What to know about the mortgage approval process

Going through the mortgage approval process is a little like going on a first date. Both you and your lender will have to get to know each other to decide if your needs are compatible and if you are comfortable entering into a long-term partnership. Your lender will want to know all the details of your current and projected financial position to decide how much they’ll lend you and what interest rate they’ll charge. Similarly, you’ll have to inquire about all the conditions your lender will place on the loan to ensure that you are comfortable and able to abide.

The mortgage approval process can be a long, complicated process, and it’s best to prepare. Here are five key things you should know.

1. There is a lot of paperwork involved

Before pre-approving you for a mortgage, your mortgage broker will want to ensure that you’ll be able to manage the associated monthly payments. Lenders require quite a bit of paperwork, including:

• A copy of your credit report
• Proof of employment (i.e., pay stubs, a notice of assessment from the Canadian Revenue Agency, etc.)
• Details about any other assets (i.e., other properties, vehicles, etc.)
• Details about any other debt or financial obligations (i.e., student loans, lines of credits, car leases, etc.)

Before beginning the pre-approval process, it is a good idea to have all this paperwork organized to help the process run as smoothly as possible. An unbiased mortgage professional will let you know ahead of time what you need to prepare.

2. Your mortgage should suit your financial situation

When selecting a mortgage product, there are a few things you’ll have to consider. Namely, you’ll have to decide between an open or closed mortgage and a fixed or variable interest rate. 

This decision will be based upon your current and projected financial position and will influence the pre-approval process.

Here are some things you should know:

Open vs. closed mortgages

An open mortgage provides you with more flexibility as you can re-pay, re-finance, or re-negotiate at any point without penalties. This is a great option if you believe you’ll be able to pay off your mortgage quickly and do not want to wait until maturity. That being said, open mortgages tend to have higher interest rates and a shorter term, which means your monthly payments may be quite substantial.

A closed mortgage is less flexible, and you will not be able to re-pay, re-finance, or re-negotiate without incurring penalties. You will have a predictable monthly payment, which can be great as it provides some stability and ease when planning your financials.

Fixed vs. variable interest rate

A fixed interest rate will remain constant throughout your mortgage term and will not be influenced by current economic conditions. Similar to a closed mortgage, a fixed interest rate can provide stability for your financial planning.

A variable interest rate fluctuates according to prime interest rates. This provides you with less certainty about the exact amount you’ll owe for your mortgage payments long-term but can be lucrative if the prime interest rate remains below the fixed interest rate offered.

3. Should you stress about the stress test?

If you’re planning on getting a mortgage, you will be required to pass a stress test. The purpose of a stress test is to determine whether your ability to stay on top of your mortgage payments can be jeopardized by a higher than the anticipated interest rate.

The interest rate used for the stress test is known as the qualifying rate. The qualifying rate depends on whether you need mortgage insurance. For insured mortgages, your lender will use the higher interest rate of either; the interest rate negotiated or the Bank of Canada conventional five-year mortgage rate. If you don’t need mortgage loan insurance, the bank will use the higher of the negotiated interest rate plus two per cent or the Bank of Canada conventional five-year mortgage rate. For more information about mortgage insurance, check out our recent blog post here.

4. Preparing good questions to ask your broker

Before committing to a lender, you want to make sure you have all the relevant details so you can make an informed decision. Be sure to ask your lender about:

• The interest rate, term, and amortization period 
• Circumstances around incurring penalties and the dollar-value of these penalties
• Any prepayment options 
• Associated fees you may have to cover

Your broker will be a valuable resource in helping you gain all the details and information needed to make the best decision for your unique financial position. 

5. Remember, nothing is guaranteed 

Hopefully, by the end of this process, your lender will approve you for your desired loan. It is important to keep in mind, however, that a pre-approval does not guarantee that that will be the exact amount you receive. Your lender will pre-approve you for the maximum amount without committing to that specific number. It is best to prepare in case you receive less than anticipated.

The mortgage approval process is an important step in the home-buying journey and will help you get into your new home as quickly as possible. It is a good idea to begin the approval process early-on and work with your broker to ensure the process runs successfully. 

When looking to secure a pre-approval, give us a call at Clinton Wilkins Mortgage Team! You can give us a call at 902-482-2770 or get in touch with us here!