If you’re planning on hunting for a home in the near future, one thing you’ll want to do before calling a realtor and hitting any open houses is to get pre-approved for a mortgage.
Getting pre-approved for a mortgage is not the same thing as guaranteeing financing for your property purchase. However, getting pre-approved does help you achieve a few important things.
By obtaining pre-approval, you’ll have a good sense both of how much you can afford to pay for a property, and how much your mortgage payments would be at that price. Pre-approval also lets you lock in the interest rate offered by your broker or lender for a fixed period, usually between 30 and 120 days. Once you’ve done that, you can shop around in search of the best rate.
So, what can you do to improve your chances of getting pre-approved for a mortgage? Here are some helpful tips.
Make sure your credit score is strong
A credit score is one of the most important indicators of a borrower’s financial health, so make sure yours is strong before you go shopping for a mortgage. In an earlier blog, we offered advice on how to improve your credit score: paying bills on time and in full, obtaining credit but not using too much of it, and keeping multiple credit accounts active, even if you no longer use all of them.
Determine what you can afford as a down payment
When it’s time to buy, you’ll need to be able to provide at least five per cent of the purchase price as a down payment, and maybe even more depending on the cost of the property.
Ideally, you’ll be able to contribute more than the minimum and avoid the cost of mortgage insurance. To do so, however, you’ll have to be able to make a down payment of 20 per cent or more. The bigger the amount you can contribute up front, the less you’ll have to borrow. The less you borrow, the less of a risk you’ll be to your lender, meaning you should get more favourable terms.
Get proof of employment and income from your employer, plus other paperwork
Lenders like to see documentation of employment and income before approving mortgages, so ask your employer to provide a letter that says how long you’ve worked there, what your title is, and how much you earn. You’ll also want to round up recent tax return information and pay stubs, and other important paperwork such as bank statements, information on any existing loans and debts, and the details of any assets you may own, such as vehicles or property.
Don’t rock your own financial boat for a bit
If you’re hoping to purchase property in the near term, now is probably not the time to start shopping for a new boat, a second car, or any other sizable expenditure that could impact your status as a borrower. Likewise, this can be a tricky time to change jobs or quit a job. Either one could threaten your agreement with your lender and lead them to impose less favourable terms on your mortgage. That doesn’t mean you should pass up a dream job offer just because you want to buy a home – just be aware that you’ll have to stay in touch with your lender to avoid potential delays in approval.