Before you venture out to look at houses for sale, it is a good idea to meet with your mortgage specialist to complete an application and find out how much you are qualified to borrow. Â
At your first appointment, you will complete a credit application. Information you need to have on hand includes:
- personal data such as your legal name, birth date, and social insurance number;
- home address and employment information;
- a description of your assets that includes what you will use for your down payment; and
- a list of your outstanding debts (credit cards, loans, etc).
Your mortgage specialist will access your credit bureau. Your credit bureau provides a history of how you manage your credit, and is a key factor that lenders review when considering your application.
Your mortgage specialist will confirm the information that you have provided in your application. You will be asked for documentation such as bank statements and current pay stubs, and will need to demonstrate that you have your down payment organized.
It is helpful to start gathering documentation ahead of time to avoid last minute stress. Typically you will need to organize the following:
- Ask your employer to prepare a letter on company letterhead outlining your name, base salary or hourly rate, normal hours worked per week, position and length of service. A recent pay stub and a copy of your T4 from last year may also be required.
- If you are a commissioned salesperson, your last two years personal tax returns and Notices of Assessment from Canada Revenue AgencyÂ
- If you are self-employed, your last two personal tax returns and the Notices of Assessment from Canada Revenue Agency, as well as the last two yearsâ€™ business financial statements and two yearsâ€™ business tax returns (if applicable)Â
- Social Insurance NumbersÂ
- At least 3 yearsâ€™ history of residence and employmentÂ
- Banking information (name of financial institutions, address, and type of accounts, account numbers)Â
- Information and statements showing your assets (what you own) and their value. i.e. cash amounts, stocks, bonds, RRSPs, vehiclesÂ
- If you are separated or divorced, you may be asked for a copy of your agreement to confirm any amounts owing (child support, alimony, division of assets)
After considering your particular situation, your mortgage specialist will submit your application to potential lenders. You will find out the maximum amount you are qualified for, and most lenders will issue a 120-day rate guarantee.
This rate guarantee means that even if rates go up while you are shopping, your mortgage will be processed at the pre-approved rate provided it closes within the 120-day period. If you have not purchased within the 120 days, it is possible to extend the rate guarantee based on current rates.
It is important to understand that even though you are considered pre-approved for a mortgage, final approval is still subject to the property you buy being considered suitable by the lender. As well, you must be able to satisfy the lenderâ€™s requirements for appropriate documentation.
How much can I afford?
Your mortgage specialist will be able to calculate the amount that you are eligible to borrow. The standard rule of thumb (subject to certain exceptions) is that your housing costs should not be more than 32 per centÂ of your gross income, and your total debt payments should not exceed 40 per centÂ of your gross income.
Gross income is the amount you are paid by your employer before any deductions for income tax, CPP/EI, pension amounts, or benefit plans.
Housing costs include the principal and interest portion of your mortgage, property taxes, and an allowance for heating costs.
Total debt payments means all of your monthly payments. This includes housing cost as well as any loans or credit cards that you have.
In my last few columns I talked about thinking carefully about your potential mortgage payment.
It is very important to consider your lifestyle and spending habits â€¦ just because you are pre-approved for a certain amount does not mean that you will find it comfortable to carry that particular mortgage payment.
You will want to plan for expenses such as heating, property taxes, home maintenance and renovation as required. Practice making the higher mortgage payment and additional expenses of owning your own home for a few months.
This will give you a good idea of whether you want to commit to the maximum amount, or perhaps scale back a little to allow for more discretionary spending.Â Â
Having a pre-approval in place before you go shopping helps you to determine a realistic price range, and allows you time to deal with any issues that may affect your application. A pre-approval provides security knowing that you have a rate guarantee in place should interest rates increase.
Once youâ€™ve booked an appointment to get a pre-approval in place, itâ€™s a great idea to write down a list of any questions you would like to have answered.
Knowing ahead of time how much you can afford will help guide your search for a new home.