The Mortgage Approval Process for Home Buying in Edmonton
Home buying can be the most exciting experience of your life. But unless you’re one of the country’s wealthiest few and have the luxury of paying for a home upfront — you’ll need to apply for a mortgage.
To make the mortgage approval process as smooth as possible, do your research, pay attention to the details, and always get help from a professional.
What Is a Mortgage?
A mortgage is a fancy word to describe a bank loan designed for purchasing a property. The properties could be residential (homes) or commercial (office buildings, small businesses).
The key differences between a regular bank loan and a mortgage loan depend on your region’s tax laws and which type of property you’re buying. Today, we’ll focus exclusively on residential properties.
But first, here’s a quick video on the mortgage approval process:
Getting Pre-Approved for a Mortgage
When you or your real estate agent finds the home you want, the mortgage approval process will eventually turn to the subject of payment.
Here’s the good news. You can submit a mortgage application to get pre-approved through your lender before your real estate agent finds your dream home.
This means you can present your mortgage approval to the seller upfront and get into your new home without delay.
However, mortgage pre-approval is not as simple as going to the bank and asking for money. The bank will need to make sure you qualify before it pre-approves you for the dollar amount you need.
Every bank or credit union is a little different, so meet with your preferred financial institution first to find out what they need. But generally, every mortgage broker will require the following for mortgage pre-approval:
- A good credit score
- Proof of employment
- Proof of collateral/assets
- A background check
Your Credit Score
These credit bureaus compile your score by collecting financial information (with your permission) from every financial institution you’ve ever dealt with — banks, credit unions, credit card companies, and even retail stores that offer credit cards.
When you meet with a mortgage broker for a mortgage application, your credit score is almost always the first thing they will check.
In Canada, your credit will range somewhere between 300 and 900 points. The higher the score, the more likely you are to get pre-approved. If your score is 749 or higher, mortgage pre-approval is nearly guaranteed.
Proof of Employment
When applying for mortgage pre-approval, you’ll also need to provide proof of employment. With this proof, the mortgage broker is looking for two things: income level and stability.
A home costs money; a lot of money. A mortgage broker will want to know that you make enough money through your job or business to afford to make monthly payments without falling behind.
No mortgage broker will issue a mortgage approval to somebody who is unemployed with no job prospects.
Making a good salary or owning a profitable business is one thing. A lender will also want to know that you can generate income consistently.
If you’ve started a decent-paying job only within the last month, a lender will be cautious about the approval process because you haven’t yet demonstrated you can hold a job. There’s no way around this point.
Proof of Collateral/Assets
Beyond proof that you can generate income, a lender will want to know that you have something to give if you should run into trouble with your business or job.
Everyone understands that sometimes, a home buyer can run into a rough financial patch. That might be layoffs at work or a business closing unexpectedly.
If a challenging financial situation should arise, the lender will want to know you have money stored in assets or big-ticket items you can sell, such as a trailer or a boat, to keep up on your mortgage payments.
A background check is not mandatory, but it’s common among most lenders. Depending on the lender’s policies, a mortgage approval or pre-approval could be denied if the applicant has a criminal history.
Ensure you check with your lender about their policies regarding background checks before entering the approval process. If the lender’s policies don’t line up with your record, checking first will save you time and you can instead find a lender that will work with you.
What’s in a Mortgage?
Once you’ve been pre-approved for a mortgage, the next step in completing the process is settling on the down payment, the mortgage rates of interest, and the length of the mortgage. Because this is a financial calculation, all three factors affect each other.
For example, a large down payment means a smaller mortgage, reflecting a smaller monthly mortgage payment or a shorter mortgage life. Let’s break down the options.
The Down Payment
The down payment is the amount of money you pay upfront when you complete the mortgage application. The more you can put towards the down payment, the less you’ll have to pay off over the life of the mortgage loan.
Also, the down payment size will dictate whether or not you need mandatory mortgage loan insurance.
In Canada, if you provide a down payment above 5% of the mortgage amount but less than 20%, you will be required to pay for mortgage loan insurance through the Canadian Mortgage and Housing Corporation (CMHC).
It’s in your best interest to make a down payment of 20% or higher. However, that’s not possible for everyone, so there are options available to you. But keep in mind those options will cost you more in the long run.
The Mortgage Rates
Mortgage rates and the life of the mortgage are linked together through a direct relationship.
- The shorter the life of the mortgage, the lower the mortgage rates.
- The longer the life of the mortgage, the higher the mortgage rates.
A lender is there to help you through the process of securing the funds to buy a home — but the lender still needs to make money. The mortgage rate is lower on shorter life mortgages because the monthly payment will be higher.
A long-life mortgage, say 30 years, will have a higher mortgage rate because, not only will the monthly payments be less, but the lender assumes there is a higher risk of loan default.
Also, mortgage rates fluctuate from day to day, so keep a close watch on the real estate market. Wait to secure a mortgage when the rates are as low as possible.
The Length of the Mortgage
A lender will typically agree to a mortgage life between 15 and 30 years. The longer the life, the more interest you’ll pay over the life of the mortgage. As with any loan, the sooner you can pay it off, the better.
What’s the Right Mix of Interest Rate, Down Payment, and Mortgage Life?
The right mix is the one that yields the monthly payment you can afford. A reputable real estate agent will say that you never want to be “house rich, cash poor”. That saying means you should reserve income to provide for your family’s expenses such as food, bills, and credit card payments.
Don’t pour all your finances into getting the biggest and best home.
When you include other factors such as bank-to-bank differences, loan consolidation, closing costs and tax credits, the calculations can get complicated. That’s why it’s always best to seek the help of a professional.
Where to Find Help
Thankfully, the staff at Best Edmonton Real Estate are trained experts in walking you through every step of securing the funds you need. From filling out the mortgage application to finding a lender to work with you who will guide you through the entire mortgage approval process.
Before you start looking for a home, speak with the professionals at Best Edmonton Real Estate. We’ll put together a plan of action that will get you the home you want — as quickly and painlessly as possible.