Mortgage pre-approval in today’s quickly moving market is an advantage every potential buyer should consider. In fact, existing homeowners may also consider consulting with a mortgage broker to refinance an existing mortgage in order to optimize their investments. We recently interviewed Stacey Petruch, a local mortgage broker in Edmonton, who discussed the advantages of becoming pre-approved for a mortgage even before finding a home to buy, as well as the option of refinancing an existing mortgage to free up funds for further investment.
A common misconception among potential buyers is that they should wait to discuss mortgage approval until either they are ready to buy a home or they have found a home. However, rather than approach mortgage approval as something to esteem towards, a potential buyer should consider the benefits of meeting with a broker to strategize how they might qualify, well before they find a home to buy.
Misconceptions in mortgage approval
Financing for a new home can seem like a daunting task. Very often potential buyers mentally disqualify themselves because of various criteria that they assume are unattainable. While there is a fairly standard list of criteria, there are certain disqualifiers that can be overcome and alternative methods that can be followed to help a person qualify. In other words, should a person feel limited with things such as immigration status, duration of employment, limited or less than perfect credit or the amount required for a downpayment, a mortgage broker can strategize with their clients on ways to meet these requirements.
A loan approval is granted based on a person’s perceived ability to pay back that loan over time. When contacting a mortgage broker, the broker will typically suggest a strategy session whereby a person will fill out an application with their personal information including ID and employment information. The down payment is also discussed whether it’s readily available or not.
Personal information
Personal information collected will also include confirmation of citizenship, permanent residency or a work visa confirmed by way of official government documentation. The assumption that one must be a Canadian citizen is incorrect; you can qualify for a mortgage with permanent residency and an active work visa. The exact specifics can be discussed with your mortgage broker.
Salary and tax history
Another of the considerations for approval is a person’s salary and employment history. A common misconception is that a person needs to stay in the same employment for two years; this is not necessarily the case. Additionally, it does not matter whether a person is salaried or paid hourly, as they are often required to produce an employment letter and pay stub from the last 30 days and if they receive overtime or a bonus, provide their last 2 years of T4s.
If a person is self-employed the approval is calculated over a two year average. In these cases, a person generally submits their last 2 years of T1 Generals with corresponding assessments: if incorporated the accountant prepared business financials are requested to confirm their net profit or net loss. Currently, a person typically qualifies for a mortgage of about four times their annual salary. Additional monthly debts including vehicle loans, line of credit or credit card balances can lower this amount. Another obstacle in today’s market is rising interest rates. The qualifying rate for mortgage approval is the mortgage rate + 2%, so as rates increase so does the qualifying rate which lowers the overall mortgage amount that a client can be approved for.
Other methods of income such as child benefit tax or being on disability are also considered as part of income for mortgage approval.
Deposit
The deposit is another criteria that people should have in place before considering writing an offer on a property. The deposit is part of the down payment but is paid when the offer is accepted whereas the remaining down payment isn’t needed until a few weeks before the possession date. If the complete down payment amount is not available at the time of the preapproval it’s okay because a mortgage broker can provide strategies as to how to come up with the funds. With a builder the typical deposit is 5% of the house cost and becomes a portion of the overall downpayment.
Downpayment
While the ideal downpayment is 20%, a typical down payment is 5%. If the down payment is less than 20% an insurance premium is charged by one of the insurers (CMHC, Sagen or Canada Gurantee). A 20% or more down payment will help avoid the insurance costs. Also something to keep in mind is that for those with a Completion Mortgage, whereby they purchase a house that is in the process of being built, have more time o save for the downpayment and can strategize a payment plan with their broker. Because today’s market is moving quickly, some builders may only offer Draw Mortgages which means that after the initial deposit is paid, portions of the down payment are divvied out by the bank to the builder over the course of the year leading up to the possession date. In Alberta, a cost that is not required is the “Land Transfer Tax”, which is required in other provinces such as British Columbia.
In terms of coming up with funds for the down payment, several strategies exist including drawing from RRSP funds which can be repaid later (over the course of about fifteen years) and having money gifted from a relative. Stacey explained that about 30% of Canadian home buyers receive financial gifts for a downpayment from their parents.
Credit Score
A credit score is important to maintain in good standing, but incidence of late payment doesn’t automatically disqualify someone. It is important however, that the late fees have an explanation. Additionally 90 days prior to qualification, all accounts are assessed so even small details like late cell phone payments can cause issues.
Refinancing
The advantages of refinancing a home in this quickly moving market can easily be overlooked. However, as the value of your house rises, there is equity that you may want to use to pay off debts or with which you can buy a rental property. Petruch explains that for example, if you have a home of $600,000, you can refinance up to 80%. Which means you can have a mortgage of up to $480,000. However, if you currently owe only $400,000, you can put the additional $80,000 against your mortgage and use the $80,000 for another type of investment – perhaps a down payment on an additional home.
No matter the status of your finances, whether you are considering refinancing, or eventually wanting to purchase a home, meeting with a mortgage broker sooner than later will keep you best informed on what would be required and have you well positioned should you come across a suitable home purchase for your family’s needs or for investment purposes. Arranging a meeting with a mortgage broker to obtain pre-approval status and to stay informed is a smart way to prepare for your future needs.