In case you missed the previous steps in my How To Buy Your First Home series:
Read on, and if you have any questions, let’s grab a coffee (or iced tea if you’re like me and don’t drink coffee) and we can gab about the process of buying your first home.
Step 2: Get a Mortgage Pre-Approval
Speak with a mortgage professional.
Nothing will give you a more accurate picture of what price point you can afford to purchase your home in than speaking with a mortgage professional. Bonus: their services and advice are free!
Having a professional give you advice on your options regarding mortgage amortization, interest rates, payment schedules, and whether to go with a fixed or variable rate is a very important step in the home buying process. A mortgage professional will be able to run some numbers for you (including calculating your Gross and Total Debt Service Ratio for you) and let you know how much you are pre-approved to purchase for.
Should you use a bank or mortgage broker?
While there is nothing wrong with walking into your local bank branch and speaking with a mortgage advisor there, I would highly suggest asking your family and friends for a referral to a mortgage professional they have had a good experience with. I can also recommend you to some of my favourite mortgage professionals who work super hard to get the best interest rates and mortgage terms for their clients, while advising them on ways to improve their financial health. If you would like the contact info for my preferred mortgage professionals just let me know.
Get a mortgage pre-approval
After a mortgage professional has collected all your personal and financial information, they will do their calculations and “pre-approve” you for a mortgage up to a certain price point. Your mortgage professional should provide a document that outlines the maximum mortgage amount you are qualified for, and also issue a “rate hold” for a specific period of time. For example, the document would guarantee you an interest rate of 3.29% on your mortgage providing you purchase your home within 90 days of the document being issued.
Once you have been pre-approved, try to keep your financial situation the same as it was at the time of the pre-approval. So don’t go making major purchases like a car, opening up new credit cards, or decide to quit your job. If you were pre-approved for a $500,000 mortgage, your lender will need to feel comfortable that you can handle this debt. Racking up additional consumer debt or losing your source of income will likely result in your lender canceling your mortgage approval.
A mortgage pre-approval is not a guarantee of financing
Keep in mind that a mortgage pre-approval is not a guarantee that you will be approved for financing when you find the home you want to purchase (for example: the bank could feel that the house isn’t worth as much as you paid for it and decide not to finance as much of the home purchase as you thought they would), but it is a responsible step to take to make sure you are house shopping within your budget. Open communication with a mortgage professional and your real estate agent is the best way to ensure there are no disappointments when it comes to getting your mortgage approved.
Once you have conditionally purchased your new home, that is your opportunity to go back to your mortgage professional and get an official commitment from them for your financing for that particular home.
A word of caution
You may meet with a mortgage professional and be pre-approved for a mortgage significantly higher than you ever thought possible. I see it all the time.
My advice would be to resist the urge to run to realtor.ca and start falling in love with homes in this higher price bracket. Pause, whip out your calculator, and go through the numbers again.
While on paper you might be able to afford a $850,000 home, would you be comfortable sustaining that large of a mortgage when you were initially thinking you would only be looking to spend $750,000? What if your spouse lost his job, what if your car broke down, what if you want to take a vacation?
If you are ok with stomaching all the “what ifs,” then go for it. Buy the $850,000 home if the bank says you can. But if your level of risk tolerance is low - average, you might want to consider buying a house that is lower than the maximum the bank says you are approved to spend. Your mortgage lender stands to make more money from you the larger your mortgage and the longer it takes for you to pay it off. You are the one that will be making the mortgage payments every month and you have to be able to sleep at night.
Do you have questions about the home buying process? That's what I'm here for! Drop me an e-mail or give me a call and I'd be happy to help.