Buying a house or investment property? We often hear how important it is to get pre-approved for your mortgage amount: It helps us understand our maximum house-price, the down-payment required and the monthly payments we’ll need to make once we purchase the property. But the difference between the pre-approval and the approval process is so vastly different that many buyers are often left feeling stressed and anxious during the week or two that financing is being finalized.
To help you avoid this aggravation and anxiety, I’ve put together a little mortgage approval cheat sheet. This should help you understand what documents and paperwork you will need to actually get a mortgage—and reduce the stress during this period of the home buying process.
Mortgage pre-approval process
This isn’t actually a process—it’s more of a marketing tool. By setting up mortgage calculators, online instantaneous pre-approval applications, and advertising low mortgage rates banks and lenders are really trying to capture your mortgage business. Why? Because lending is a big business with phenomenal returns (see this CBC article about the “shadow” mortgage mortgage, or why people like you and me are risking our money by lending it out).
But that doesn’t mean the pre-approval process is useless. The biggest advantage is that you can lock-in your rate for 30 to 90 days, depending on the lender. If rates rise during that time, you’re protected with the price lock. If they fall, consider shopping around again to make sure you have the best rate and mortgage option.
Now, all you get with a pre-approval process is an open file at a lending institution (or mortgage broker, who should do the periodic-rate shopping automatically for you) and the rate-lock. That’s it. There is no guarantee that you’ll get approved for the mortgage, or that this is the final rate you will pay for your mortgage. Those details can only be determined when you actually apply for a mortgage.
And herein lies the dilemma: A lender won’t actually go through all the paperwork until you’ve made an offer on a real property. Why? Because a mortgage application is as much about assessing you as the borrower as it is about assessing the property being bought. For the vast majority of home buyers this isn’t a problem. However, those with high debt ratios (see my post about debt thresholds and how it impacts your mortgage, go here), for the self-employed, or real estate investors who already own three or more properties, you’ll want to find a mortgage broker or lender that’s willing to review your paperwork during the pre-approval process. While many lenders won’t do this, it’s an important step if you don’t want to be scrambling during the financing stages of mortgage approval. Mortgage professionals that do a more thorough pre-approval verification are able to determine where you might get flagged by lenders and how and what to submit in order to satisfy lender mortgage requirements.
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Mortgage approval process
So, you’ve found the perfect home, you put in an offer and won. Now it’s time to seal the deal and this boils down to money. So you call your lender to finalize the mortgage. That’s when you’re going to get hit with a list of paperwork that’s required for your application. The paperwork you’ll need includes:
* Personal information: Age, marital status, number and age of kids
* Employment details: This includes proof of income (such as T4 slips, copies of your last two paystubs, personal income tax returns, Notice of Assessments from the CRA for the last two tax filing years, and a letter from your company’s HR department stating your position, length of service and salary)
* If self-employed you’ll need to provide: Incorporation documents, if applicable, as well as financial statements of the corporation for the last two to three tax years. You’ll also be required to submit full personal tax returns as well as CRA Notice of Assessments for both the corporation as well for you personally. The lender may also ask to see portions of your books, such as your General Ledger or Profit & Loss statements. Talk to your accountant or bookkeeper for these reports.
* Other sources of income: Typically this is a statement on your part, but the lender could ask for back-up documentation. Other income can include pension, rental income, part-time work, etc. You’ll probably be asked for copies of your tax returns, or copies of paystubs or rental income documentation
* If you already own property: A copy of the mortgage statement on your current property and a copy of last year’s property tax statement and, perhaps, this year’s up-to-date property tax statement.
* Current banking information: Including bank, branch, accounts and balances
* Verification of your down payment: This can be a snapshot of a bank account where the money is currently deposited, or a letter from a family member stating that the money is a loan or gift
* Consent to run a credit history search: Every lender will either verbally ask for permission (and then obtain your Social Insurance Number) or ask you to sign an authorization form allowing them to pull your credit history.
* List of debts (otherwise known as liabilities): This is where people sometimes opt to exclude a few items owed, but you need to resist this urge. Your credit history will show all outstanding money owed, so be upfront and honest. Provide a list of what is owed, to whom you owe it to and what monthly payments, if any, you put towards paying down the debt. The list should include student loans, credit card balances, car loans, monthly lease (or lease-to-own) arrangements and personal loans.
* Copy of the listing: You will need to print off a copy of the MLS listing and include this in your mortgage documentation package.
* Copy of purchase document: You will need a copy of the document you signed to buy the home. Known as the Agreement to Purchase and Sale, it’s the thick document that states the address, what’s included/excluded and the price, deposit and down-payment you agreed to.
* Condo documentation: If you’re buying a condo or strata-townhome, you’ll also need to include the condo corporation’s financial statements and status certificates.
* Rural property: You’ll need to include the certificate for the well and/or septic tank if you’re property isn’t on municipal water and sewer.
If you want to reduce your stress during the financing phase of your home purchase, and you don’t want to or can’t submit all this information prior to finding a property then consider gathering up all this documentation ahead of time. Just having all the documentation at the ready will reduce your workload and free you up to concentrate on last-minute requests.