The Buying Process Step 4 : Getting Your Financial House In Order

Financing, budgeting & Mortgages

Getting a Mortgage Pre-approval.

In today’s home buying environment, a mortgage pre-approval is not only essential, it is also incredibly easy to obtain and can be done over the phone or in person. A mortgage pre-approval lets you know the maximum mortgage amount the lender is prepared to lend you. It also demonstrates to a seller that you are a serious, willing, and capable buyer. It goes a long way to provide you with the lender’s formal loan commitment once you have found the home you would like to buy.

Do I Go to My Bank or to a Mortgage Broker for my Pre-Approval?

You should see both. See what your bank can do for you. Interview a mortgage broker as well because they have access to many lenders and can obtain quotes from the various lenders who are best positioned to meet your requirements. Mortgage Brokers understand what qualifications each lender is looking for and can structure your application accordingly. They also know where the bargains are. Mortgage Brokers are usually compensated by the lenders they represent.

How Much Can You Afford?

You can afford a house that costs as much as the mortgage amount for which you qualify added to your total down payment.

Check Out Your Own Credit Report

Lenders will ask for your permission to obtain and examine a credit report detailing your credit history. Information contained in your report formulates their decision whether or not to lend you money. It also is used in consideration of what interest rate the lender is prepared to offer prospective borrowers. Credit reports precisely describe existing credit card limits, timeliness of payments, types of accounts, loans, balances, judgments, and bankruptcies and easily identifies any exaggerations or misrepresentations made on mortgage applications. Credit reports are not infallible however and you should request a copy of your own report so that you can confirm its accuracy before you formally apply for mortgage pre-qualification. You may challenge any errors and attempt to rectify wrong information before it works to your mortgage approval disadvantage.

How to Obtain You Own Credit History Report

There are two main credit bureaus in Canada; Equifax, and Trans Union of Canada, both of which will provide you with a free copy of your own report. Contact them directly for details on how to go about it.

www.consumer.equifax.ca

or

www.transunion.ca

Pre-Qualification

This is the first step in obtaining a mortgage. Pre-qualification is the lender’s estimate of your borrowing power. Your ability to buy depends on your approved capacity to borrow. In the pre-qualification process the lender will review your mortgage application and usually request a credit report. After analyzing your credit history, income, and debts the maximum loan amount for which you would qualify will be confirmed.

Pre-Approval

The line between pre-qualification and pre-approval often gets blurred. Occurring quickly on the heels of pre-qualification, pre-approval formalizes the estimate of a buyer’s borrowing power and leads to provision of some type of commitment or offer to place a mortgage from a lender or mortgage broker. It would involve a credit application and usually requires income verification as well. The lender carefully analyses your financial situation by applying their established standards for underwriting.

How Much Should I Try to Get Pre-approved for?

Secure a pre-approval for the highest amount for which you would qualify. Only spend into your comfort zone but it is important to establish your maximum approval parameters.

Loan Commitment and Final Loan Approval

The pre-approval process concludes with you obtaining a letter or certificate of commitment from a lender to place a mortgage with you and their final approval of that loan. The commitment certificate or letter is confirmation that you have been approved as a borrower by the lender for a specified amount at specified terms. Please carefully review the letter as it usually places caveats on their final loan approval. Lenders usually reserve the right to have their own appraisers confirm market value of the house you want to finance. They may want to ensure that the house complies with their underwriting standards, verify information, or re-check your credit before granting final loan approval. Carefully review approval documentation with your lender or mortgage broker and discuss any implications of buying a house without a financing condition.

Get Your Pencils Out!

While your bank or mortgage broker will be able to tell you the exact range for which you can be approved, it is a good idea to also calculate what you feel comfortable spending. You must recognize and accept the extent of the financial commitment you are about to undertake as you will likely be making mortgage payments for many years. You may not want to commit to monthly mortgage payments as high as the amount for which you qualify. Only you know how much you are comfortable spending on monthly mortgage payments.

Total Down Payment

You must determine exactly how much money you now have available to invest in your down payment and closing costs. This is the total amount of cash available. If you already own a home you will need to estimate the amount of equity you have acquired in your house so that you can add this calculation to your available savings for a down payment. This is your Total Down Payment.

Closing Costs Estimation

Part of your available cash will have to be kept aside for expenses incurred to complete the sale. Even though you will not be able to establish the exact expense total at this time, you should be able to arrive at a very close approximation of your total costs through discussion with your lawyer.

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