If you’re a first-time homebuyer, the process of applying for a mortgage may feel daunting. Before you can sign on the dotted line, there are numerous steps you’ll need to take before being approved for a mortgage loan on a home purchase. To help inform you on the process, we’ve consulted with Sherry Speakman, National Manager of Builder Business Development at CIBC, and Greg C. Waters, Builder Development GTR at Royal Bank of Canada. See what they want you to know about getting approved for a mortgage.
What is a mortgage pre-approval, and where do first-time homebuyers get one?
Sherry Speakman: “A mortgage pre-approval estimates the mortgage amount that a first time home buyer may qualify for. It is recommended that they consult with a mortgage advisor before they begin their search for a new home.”
Greg C. Waters: “Like with any big purchase, you need to know what your budget is before you go out and buy. This is where getting prequalified for a mortgage can really help, as it can give you a personalized estimate of how much you may be able to afford. By answering a few quick questions about your income, debts and expenses, you can set a realistic price range and start your search with a budget in mind. When you get pre-approved for a mortgage, a lender will make a commitment to loan you money (subject to some conditions).”
Advantages of Being Pre-Approved:
- Your rate will be locked in for 120 days and protected against increases if you choose a fixed mortgage rate.
- Real estate agents and sellers will take you more seriously because they know you’re committed to buying and have solid financial banking.
- You’ll be able to create a long-term budget plan, as you’ll know what your monthly mortgage payment will be.
What do lenders and brokers look at before approving someone?
SS: “The three most important factors that determine mortgage qualification are credit history, income verification and downpayment. A homebuyer’s income will confirm that the borrower will be able to meet their monthly mortgage obligations. Credit history refers to a borrower’s previous credit repayment patterns and is a key component of any lending decision. Downpayment will help determine your purchase price range.”
GW: “Typically, lenders look at two main comparisons as ratios to see if a potential buyer can afford the mortgage. The first compares your income to your mortgage expenses (Gross Debt Service or GDS), and the second compares your gross annual income to your existing debt — house, credit cards, personal loans and car loans (Total Debt Service or TDS). As a general rule of thumb, no more than 30% to 32% of your gross annual income should go to mortgage expenses, including principal, interest, heating costs and property taxes (plus fees for condominium maintenance).”
What do first time homebuyers need to consider during the pre-approval process?
SS: “During the pre-approval process, a discovery conversation will take place between the first time homebuyer and the mortgage advisor to determine the buyer’s home ambitions. These types of conversations will assist the first time homebuyer in determining what is important to them with their new home purchase and provide a roadmap to achieving their ambition.”
GW: “Remember that when it comes to buying a home, it all begins with knowing how much you can afford. A pre-qualification will help you determine your price range and kick off this exciting milestone with confidence. It’s also important to understand any other ongoing costs — or carrying costs — you’ll need to cover as a homeowner, including expenses like grocery bills, transportation, or internet.
What do first time homebuyers need to provide to their lender or mortgage broker?
SS: “For all buyers, income and down payment documents are required up front when submitting a standard mortgage application with a financial institution. Homebuyers are also required to provide documents related to the property they will be purchasing; for example, a signed and accepted copy of the Agreement of Purchase and Sale document.”
What happens if their mortgage application is declined?
SS: “Some financial institutions are able to offer clients standard as well as non-standard financing solutions to support their home purchase. If a client does not qualify for standard financing, Mortgage Options Specialists can work seamlessly with the client to secure alternative financing solutions so the client can achieve their homebuying ambitions.”
Any other questions or considerations?
SS: “Buying your first home is an exciting time. Meeting with a mortgage advisor is a great way to begin your home buying journey. They will guide you through the process to ensure you are ready financially to make a purchase when you find your dream home.”
GW: “Saving for a downpayment is hard work, and might take more time than you’d hoped — especially if you’re mentally ready to buy now! Sometimes you need a bit of help to get your down payment together — and sometimes you might need to get creative. You can save for a downpayment by opening a dedicated home savings account, joining forces with a friend for investing or seeing if your family is willing and able to help, or by using your RRSP. And as Sherry said, don’t be afraid to connect with an expert. Mortgages can are an unfamiliar process for first time homebuyers, but specialists are always available to answer any questions you may have about your downpayment or any other step of your homebuying journey.”
Meet the Experts
Sherry Speakman, National Manager of Builder Business Development at CIBC, and Greg C. Waters, Builder Development GTR at Royal Bank of Canada.