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Unless you’re planning to purchase a home with cash, you’ll need to take out a home mortgage. Getting approved for a mortgage is a fairly simple and straightforward process if you follow a few guidelines, according to Mujtaba Syed, a mortgage specialist for the Bank of Montreal.
In this post, Mujtaba weighs in on five of the primary steps of the mortgage approval process in Canada.1. Apply for mortgage loan preapproval
Before you begin your homebuying and home shopping journey, it's wise to attain mortgage loan preapproval.
When you obtain mortgage preapproval, lenders will provide you with a maximum amount you’ll likely to be able to borrow towards a new home purchase. That can save you time and disappointment by narrowing the search for homes that you can afford. Gaining loan preapproval can also help legitimize you as a serious homebuyer to sellers.
Mortgage preapproval determines how much money you can borrow and the type of loan you qualify for. A preapproval doesn’t guarantee a mortgage loan, but it’s a good start to help streamline the process for the actual mortgage loan. Lenders look at several factors to determine the size and type of loan you may qualify for.What is the mortgage preapproval process?
“When you go into a loan preapproval meeting, you bring your financial documentation with you,” says Mujtaba.
“Depending on your specific financial situation, documents the lender requests will vary,” Mujtaba says. Lenders typically look at several factors in determining the size and type of loan, including your:
“The lender will sit down with you and instruct the process, which is what we call our preapproval application. They'll ask questions regarding your income, your assets and your liabilities. They'll also go over your credit with you.
”The lender will then provide you with a loan estimate that you can afford that is within your budget.
If your financial or life situation has changed when you take out the actual mortgage loan, for example, you lose your job, you may no longer be eligible for the loan. Preapprovals are usually good for about 90 days, says Mujtaba, but there are circumstances in which the preapproval can be extended.
“Let's say your preapproval has expired in 90 days, you can come back and see your lender again, and we can extend that again for another 90 days, as long as your situation hasn't changed,” he says.
Homebuyers, especially first-time homebuyers, may not be aware that there is a difference between mortgage preapproval and mortgage prequalification.
Prequalification is a process in which you provide a prospective lender with an informal overview of your financial situation. In turn, the lender provides you with an estimated loan amount based solely on the verbal information you provided. Mortgage prequalification has no supporting documentation on your financial status to show that you are qualified for a mortgage and an amount to borrow.
Mortgage preapproval is more involved. You must provide documentation that proves your financial standing. You’ll be provided with documents after approval that demonstrate your ability to purchase a home up to a specific dollar amount.
After you have received your prequalification, it’s time to work with the seller and submit an offer.
“So let's say you find that perfect home, that's for $400,000. You write an offer on it, saying you're willing to pay $390,000 for it and the offer gets accepted by the seller at that amount,” says Mujtaba.
The seller will “give you a certain time period to get what we call a ‘condition of finance.’ Once that day starts, the clock actually starts ticking from that time, and you have that specific time period to get loan approval.”
Remember that mortgage preapproval is a precursor to getting an actual mortgage for a particular home. Preapproval can help shorten and simplify the process of applying for the actual mortgage.That, Mujtaba says, is why he stresses to clients the importance of getting loan preapproval. “Because if everything is already in place, all you have to do is get the sales contract, provide it to the lender and we can approve your loan and the property at the same time.”
“From the time the lender submits the documentation to the underwriter, an individual in the back end of the file that assesses it, it should only take 24 to 48 hours maximum. It shouldn't take longer than that”, says Mujtaba.
Occasionally, there may be system delays or there's a backup or a log that's moving very slowly, he says. “But your lender will be able to tell you that at that time, because they technically have an idea.”
“They are totally different,” says Mujtaba. “You could get approved for a much higher amount, but it might not fit your personal budget.
”That’s why Mujtaba recommends you be familiar with your own financial budget to avoid ending up with a monthly mortgage payment that is beyond your personal budget.
Mujtaba advises determining the maximum monthly mortgage payment you can afford before your initial meeting with a lender. “[A lender] will typically qualify you for the maximum amount, especially in the initial stages, because they have no idea what's going to be on the market when you go on a homebuying search.”
In determining whether to approve the mortgage loan, lenders consider what Mujtaba says are called “the five C's of credit.” These include:
Following are explanations of each term.
Capacity simply means whether you can afford the home that you're purchasing, based on the stress test and the loan amount. “For that, we will ask you for certain types of documents that you might need, depending on your financial situation,'' he says.
If you are an employee, you may be asked to supply:
If you're self-employed, “it can be a very different conversation,” Mujtaba says“They could be as simple as two-year tax returns or we'd do a deeper dive if we can't find the information that we're needing. But the lender will tell you at that time what you need to do,” he says.
“Lenders will also look at your credit. We want to make sure that you have good credit to buy a home,” says Mujtaba, “which in Canada is having a minimum 600 credit score.”
“If you have anything lower, unfortunately, you will need to get a cosigner for the loan. That will be someone who has a higher threshold of credit to help you with the loan.”
There's also guidelines with regard to higher ratio loans, he notes. “If you want to take out a mortgage for your maximum borrowing amount, you want your credit to be 680 or higher. If your score is less than 680, your purchasing power is going to be a little bit less, based on the threshold.”
Collateral is what you own that could be used in lieu of payment in the event you are unable to repay the mortgage loan.
“We also want to make sure that the home meets our guidelines. Let's say there's no issues with the home: It's not too old and it's not falling apart. If it’s a condo you’re buying, we make sure there are no special assessments on it,” he says.
Lenders look for such conditions, “because not only are they using their property as collateral, we are also trying to save you from making a poor investment. As a homeowner, you don't want to get stuck with something that you, unfortunately, did not know and now you're stuck paying that mortgage for 25 years, and let's say the value's not there or there's a major issue with the home.”
When you enter into a contract with the mortgage lender, you are making a promise you’ll pay your mortgage and pay it on time. To judge that promise, they will examine your character by assessing your credit and income.
“We check to see whether you can afford to pay and that you will pay what you promise to,” Mujtaba says.
Mujtaba says lenders look at your net worth, which is your assets minus your liabilities. This gives lenders a good look at your capital.
“It just really depends on a lot of different situations,” he says. “ If the underwriter or the bank looks at a certain life stage you're in, you're just starting out for the first time, you might have some student loans, so your capital might be negative or your net worth might be negative. It's not a big deal if it’s aligned with your current stage in life.
”However, if you’re 60 or 65 and you have negative net worth, the bank might think or look harder and wonder about your ability to repay the loan. In that circumstance, they might wonder why you don’t have any history of borrowing or having any history of saving and question you more, he says.
Mujtaba says the impact on your credit score may vary when you’re entering the mortgage approval process. He says it’s a case-by-case scenario.
Shopping around for mortgages or rate shopping and having your credit pulled each time can affect your credit. This can signal that “[a person hasn’t] gotten approved for the first four [places, and are] now going to their fifth, now they're a credit seeker and they haven't gotten approved,” Mujtaba says. “So that is what the credit bureau thinks, and it reduces your credit score.
”He advises that if you are rate shopping, make sure that the lender is not pulling your credit report each time.
Mujtaba says most borrowers “don't ask … about the nitty gritty terms and conditions of a mortgage.”
Here are things Mujtaba encourages borrowers to ask:
Mujtaba says small differences in the rates are less important than terms and conditions in the loans. Therefore, make sure you ask questions and understand the differences between loans.
“A 0.1 difference in an interest rate to me does not make or break a loan,” he said. “But the terms and conditions can make or break it for clients.”
If you want to prepay an amount toward the mortgage, Mujtaba says “you would want to discuss that with them beforehand, and say ‘I want to prepay 20% of my original mortgage balance every year. Can I do that?’"
You might find out that you can be penalized for paying significantly over your balance, which doesn’t benefit you in the end.
“If that answer doesn’t fit with your budgeting and criteria, I would go and speak to a lender that does,” he says.
A mortgage cash account allows you to re-borrow funds that you’ve prepaid into the loan that are above your normal mortgage payment.
“Doing that reduces your mortgage by that amount you’ve prepaid,” Mujtaba says. “It sits in something called a ‘mortgage cash account.’ So let's say in the future, if you have an emergency or you have a need for that fund, you can actually go back into the bank and take that money out without having to requalify.”
Cash accounts are a great incentive tag that may be built into a mortgage, one that Mujtaba says many people may overlook if they don’t ask about all of the terms in the loan.
The mortgage approval process in Canada can be a bit tricky to understand. Hopefully, the five tips above can help you navigate the process and end up in your dream home. For more information on homebuying, go to our blog for interesting topics such as how to buy a home without a realtor and how getting preapproved for a home loan can benefit you.
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