After years of saving, you’ve finally got enough for the down payment on your first house and you think you’re ready to go house hunting, except there’s just one problem: you have no idea what kind of house you can afford. That’s why it’s a good idea to get a mortgage pre-approval even before you start looking for a house to narrow the field and find the dream house that fits your lifestyle and budget.
Why Get Pre-Approved?
Getting pre-approved will provide you with the peace of mind of knowing the price range of houses you should be looking at. Once you supply the bank with your personal financial information, the bank will be able to provide you with a pre-approval of how much they are willing to lend you and at which interest rate. For example, based on your income the bank may be willing to give you a mortgage up to $320,000; if you have a down payment of $50,000 you could potentially buy a house up to a selling price of $370,000. It’s important to emphasize the words “up to”, as it’s key to look at the hard numbers and determine if you are comfortable stretching yourself financially.
Besides affordability, a mortgage pre-approval gives you peace of mind: once you find the house you’re looking for and you’re ready to make an offer, you can choose to exclude the condition of financing. In a multiple offer situation, the cleanest offer (the offer with the fewest conditions) has a good chance of being selected by the seller. For example, in March I made an offer on a house at $423,500 (the house was listed at $419,500), while another buyer offered $417,000; I can only speculate, but I believe the other buyer ended up winning the house because they left were pre-approved by the bank and were comfortable leaving out the condition of financing.
What is Required to Get Pre-Approved?
For most people, a mortgage is the biggest debt they’ll ever undertake, so it’s no surprise that the bank requires a lot of documentation before will pre-approve you. Be sure to supply your mortgage specialist with the following:
- Personal identification, such as your driver’s license and SIN card.
- Your most recent pay statements and your job offer letter from your employers within the last two years.
- Financial and bank statements as proof of your down payment.
- Income tax returns from the last two years.
- A list of questions and a pen and paper for taking notes.
What does the Bank Look for When they Pre-Approve Someone?
Besides having a large down payment, two important criteria to the bank are your credit score and your employment history. Having a good credit score can be challenging for first-time home buyers for two reasons: they lack sufficient credit history or they are neck-deep in debt from student loans and credit cards. That’s why it’s a good idea to start credit history as early as possible; even if you make a few purchases on a credit card and pay them off every month, at least it will show the bank that you can handle debt. Banks are also looking for steady employment history; if you’ve been with the same company and earn a decent wage you’re more likely to get pre-approved than someone who has had five jobs in the past two years.
It’s a good idea to do your own research and shop around for the best mortgage pre-approval rate. Some banks, like ING Direct, offer the same rate to all clients, while other banks allow you to haggle for the best rate. It’s also important to know the features banks offer with their mortgage. For example, with a Scotiabank mortgage you increase your monthly mortgage payments by 15%, pre-pay up to 15% of your original principal each year, and double up your mortgage payments. These features can allow you to pay down your mortgage significantly faster.
I’ve only touched the tip of the iceberg when it comes to mortgages. It’s a good idea to speak with your realtor or your local bank branch and get in touch with a mortgage specialist who can sit down with you and explain the in’s and the out’s of mortgages. That way when you finally find the house you’re looking for, you can confidently put in an offer instead of scrambling for a mortgage pre-approval at the last moment.
For you home owners out there, what was your experience obtaining your first mortgage? Did you get pre-approved?
If you’re interested, here are other real estate posts.
About the Author: Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University.