A mortgage preapproval puts you in a strong position and provides you with a roadmap for the homebuying journey.
Are you dreaming of owning your own home in Canada? The first step on your journey to home ownership is securing a mortgage pre-approval. This essential step not only helps you understand your budget but also puts you in a strong position when it comes to making an offer on your dream home. In this blog post, we'll guide you through three easy steps to achieve mortgage preapproval in Alberta.
Step 1: Get mortgage pre-qualified to understand your financial situation
Before you dive into the mortgage preapproval process, it's crucial to have a clear understanding of your financial situation. Start by assessing your income, expenses, and existing debts. This will give you a realistic picture of how much you can afford to spend on a home. Here are some key factors to consider:
Calculate Your Monthly Income
Determine your total monthly income, including your salary, bonuses, rental income, and any other sources of revenue. Make sure to consider your gross income, which is your income before taxes.
Analyze Your Monthly Expenses
Create a comprehensive list of your monthly expenses, such as rent, utilities, groceries, transportation costs, and any outstanding debts like credit card balances, student loans, or car loans.
Check Your Credit Reports & Assess Credit Score
Your credit score plays a significant role in your mortgage preapproval process. Lenders use this score to evaluate your creditworthiness. Check your credit report for any errors and take steps to improve your score if necessary. Paying bills on time and reducing outstanding debt are two effective ways to boost your credit score.
Calculate Your Debt Service Ratio
It is a financial metric used to assess an individual or household's ability to manage their debt obligations in relation to their income. In Canada, like in many other countries, the DSR is an important factor considered by lenders when evaluating a borrower's creditworthiness.
To calculate the Debt Service Ratio in Canada, you will typically use two components: the Gross Debt Service (GDS) ratio and the Total Debt Service (TDS) ratio.
Gross Debt Service (GDS) Ratio:The GDS ratio calculates the percentage of your income that goes toward housing-related expenses, including mortgage payments, property taxes, heating costs, and, if applicable, 50% of condo fees.
Total Debt Service (TDS) Ratio:The TDS ratio takes into account all of your debt obligations, including housing-related expenses (GDS), plus other debts like credit card payments, car loans, and personal loans.
Keep in mind that these ratios are just one factor that lenders consider when evaluating your creditworthiness. They also assess your credit history, employment stability, and other financial factors.
Additionally, the specific calculation and acceptable ratios may vary slightly among different lenders and mortgage insurers in Canada, so it's a good idea to check with your mortgage broker to confirm their criteria.
Different lenders may have slightly different criteria and policies, so it's advisable to talk to your mortgage broker to shop around and compare offers from multiple lenders to find the best mortgage that suit your financial situation and goals.
Step 2: Gather required documents
Once you have a clear understanding of your financial situation, it's time to gather the necessary documents for your mortgage pre-approval application. Having all the required paperwork ready will streamline the process and demonstrate to lenders that you are a serious and organized home buyer. Here's a list of common documents you'll need:
Proof of Income & Employment
- Pay stubs from the last two to three months.
- T-4s for the past two years.
- Letter of employment.
- If you're self-employed, provide business financials and business tax returns.
Proof of Assets
- Bank statements for the past three to six months.
- Statements for any investment accounts or savings accounts
- Statements of RRSP
Proof of Identity
- Government-issued photo identification, such as a driver's license or passport.
Save for the Down Payment & closing costs
Save for a down payment, which is usually a percentage of the home's purchase price. In Canada, the minimum down payment required for a home purchase depends on the purchase price:
For homes priced up to $500,000, the minimum down payment is 5%.
For homes priced between $500,000 and $1 million, the minimum down payment is 5% on the first $500,000 and 10% on the portion above $500,000.
Homes priced over $1 million require a minimum down payment of 20%.
It's important to note that if your down payment is less than 20% of the purchase price, you will need to purchase mortgage loan insurance through the Canada Mortgage and Housing Corporation (CMHC) or other mortgage insurance providers.
Save for the closing costs
Closing costs are additional expenses you'll need to cover when buying a home. These costs can vary but typically include:
Legal fees for lawyer, Title insurance, Property transfer tax, Home Inspection, Appraisal fees, Property tax adjustments, Moving costs etc.
To estimate the total amount you need to save, consider the following steps:
Determine the purchase price of the home you want to buy.
Calculate the minimum down payment required based on the purchase price.
Factor in the closing costs, which can vary widely by location and property type. A common rule of thumb is to budget around 1.5-2% of the purchase price for closing costs.
For example, if you're buying a $400,000 home, a 5% down payment would be $20,000, and your closing costs could be around $6,000 depending on your specific circumstances.
Remember, these figures are approximate, and it's essential to consult with a licensed mortgage broker to get a more accurate estimate in your situation.
Additionally, various government programs and incentives may be available to help first-time home buyers with down payments and closing costs, so be sure to explore those options as well.
Gift Letters (if applicable)
If you're receiving a gift for down payment from a family member, you may need a gift letter to confirm that the funds are a gift and not a loan.
Step 3: Work with a Mortgage Broker
Now that you've assessed your financial situation and gathered the necessary documents, it's time to partner with a mortgage broker or lender to initiate the preapproval process. Mortgage professionals have extensive knowledge of the local real estate market and access to a variety of lending options, making them invaluable allies on your homeownership journey.
Research and Choose a Mortgage Professional
Start by researching mortgage brokers and lenders in Alberta. Consider factors such as their reputation, experience, and the range of mortgage products they offer. Ask for recommendations from friends, family, or real estate agents.
Schedule a Preapproval Meeting
Once you've identified a mortgage professional you trust, schedule a preapproval meeting. During this meeting, they will review your financial situation, help you choose the right mortgage product, and guide you through the application process.
Discuss Govt. Programs & Incentives
Canada offers several first-time homebuyer programs and incentives at the federal and provincial/territorial levels to help make homeownership more accessible for those buying their first home. These programs aim to provide financial assistance, reduce down payment requirements, and offer tax incentives.
It's important to consult with your mortgage broker to determine which programs you may qualify for and how they can benefit you when purchasing your first home.
Complete the Preapproval Application
Prepare to provide all the documentation you've gathered in Step 2. Your mortgage professional will use this information to assess your eligibility and determine the maximum loan amount for which you qualify. Be prepared to answer questions about your employment, credit history, and financial goals.
Receive Your Preapproval Letter
If your application is successful, you will receive a preapproval letter from the lender or mortgage broker. This letter outlines the maximum loan amount you are qualified for and is typically valid for a specific period, often between 60 to 90 days. Having this letter in hand will give you a competitive advantage when making an offer on a home, as it shows sellers that you are a serious and well-qualified buyer.
Getting a mortgage preapproval in Canada before house hunting is very important as it provides clarity on your budget, gives you a competitive edge, streamlines the buying process, and ultimately enhances your overall home buying experience.
Remember that every home buyer's situation is unique, so it's essential to tailor your approach to your specific needs and goals.
kvij@mortgagealliance.com I (780) 233-8500
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