2. Getting Pre-Approved for a Mortgage
How much you can afford based on lender underwriting criteria, and how much you feel comfortable spending can be two different numbers. A good starting point is to find out what you are qualified to borrow based on lender underwriting ratios. This normally begins with completing a mortgage application with a bank, a lender, or through a mortgage broker.
2.1 Obtain your credit report
Before you apply for a loan, it is a good idea to obtain a copy of your credit report and check it to make sure that it is accurate. There are two main credit reporting agencies: Equifax Canada Inc. (www.equifax.ca), and TransUnion of Canada Inc. (www.transunion.ca). Contact either company to obtain your credit report.
You establish a credit file when you borrow money and pay it back. Your credit file details how you use credit and when you make payments. The information in your file is based on information given to the credit bureaus by creditors such as credit card companies and banks. Your credit report will show your payment history.
On your credit report you will notice an R or I preceding a number (e.g., R1, R2, I1, I2). The R indicates revolving credit such as a credit card, and an I means installment credit such as a vehicle loan or student loan. The number indicates the time you take to pay the minimum amount due. For example, R1 or I1 means that you have made at least the minimum payment (or more) when it was due. R3 or I3 means you are 60 days behind the due date. A higher number is not good because it means you have been even later with your payment obligations.
Your credit report will also give you a credit score, known as the “Beacon Score” if it was obtained from Equifax; or “TransRisk Score” if obtained from TransUnion (e.g., 580, 630, 800). For simplicity, we will refer to it as your “credit score.”
In the case of the credit score, the higher the number the better. Lenders and insurers have minimum credit score numbers in relation to down payment requirements and debt ratios. Having and maintaining good credit is important. Items that are used to calculate your credit score include your payment history (i.e., whether or not you make your payments on time), length of credit history, amounts you currently owe relative to your credit limits, number and frequency of new credit inquiries, as well as the type of credit loans you have (e.g., vehicle loans, credit card balances, lines of credit).
The lender will look at your credit report and credit score to determine the risk. If you have a credit score lower than 600, this will affect your ability to acquire a high-ratio mortgage with less than a 20 percent down payment. If your down payment is from non-traditional sources (e.g., a gift from family), the mortgage insurer may require a credit score of 650 for a high-ratio borrower with a loan value greater than 80 percent. Many variables are considered; the lender will look at the strength of the deal, especially if there is a co-borrower with a good credit score. Visit CMHC (www.cmhc-schl.gc.ca) for an outline of the criteria along with recommended credit scores for a variety of situations.
If you are obtaining a mortgage with other borrowers, the lender will look at each person’s credit score. If one of the borrowers has a low score, it may affect the terms of the loan.
Occasionally, there are errors in your credit report. Mistakes could include credit history that isn’t yours or inaccurate reporting of bill payment. Any inaccurate information or error may be used to calculate your credit score, which could be a problem for you. If you find any errors, you will need to contact the credit bureaus in writing. If you have any documents that can prove or support your situation, send the credit bureaus a copy with a written explanation. This could take a few months to investigate and resolve. Credit bureaus will correct false information only. If a situation occurred where you missed a payment due to a circumstance, you can ask that a comment be included on your credit file explaining the situation (e.g., credit fraud or identity theft). This may (or may not) be taken into consideration on your credit score. Your bank representative or mortgage broker may be able to provide guidance or assistance with respect to contacting the credit bureaus and remedying any errors efficiently.
Be careful when shopping for a mortgage not to trigger multiple credit checks, as your credit score on your credit report may be adversely affected by the number of credit check requests occurring — especially over a short time span. It could be interpreted as you opening many accounts due to financial difficulties and taking on too much debt. When working with a mortgage broker that shops the mortgage market on your behalf, request that only one credit check is performed and that this same credit report is used for all the lenders.
If you have no credit history, it is important to establish one because the lender will have no information to assess the risk. Consider obtaining a credit card, but make sure that you make timely payments. You will need to do this several months prior to applying for a mortgage to ensure that a period of time has passed in order to create a credit history.
If you need to repair and improve your credit history, it will take some time. Your credit score is weighted towards your most recent performance; however, historical information, positive and negative, stays on the file for many years — the number of years varies depending on the item (e.g., bankruptcy, judgment) and the province or territory. Set up methods to ensure that your bills are paid on time; timely payments will improve your credit score. Consider automatic payment plans. Try to keep balances low on credit cards. If you can afford it, double up on your minimum required payments. Speak with your mortgage professional about the possibility of combining all your debts into one loan with a lower interest rate. Investigate different solutions. It is also important if you have student loans to be cognizant of your payment dates and obligations. Your credit score is an important element to obtaining a mortgage.
2.2 Understanding the difference between pre-qualify and pre-approval
Many buyers use the terms mortgage pre-qualify and mortgage pre-approval interchangeably. Many people believe they mean the same thing but this is not the case.
To be pre-qualified, you simply get an estimate of how much of a mortgage you will likely be able to qualify for based on current interest rates — a credit check and verification of employment have not been completed. During a pre-qualification meeting you present to the lender details of your income, expenses, assets, and liabilities to determine how much of a mortgage for which you will likely qualify.
A pre-approved mortgage is a formal application process. During the process you will be asked for information regarding your finances and creditworthiness — a credit check will be completed and your income will be verified. The lender or mortgage professional will use several factors, such as your income amount, credit score, employment records, and the amount of down payment you have, as guidelines to determine how much of a mortgage it will pre-approve for you. The lender will request a list of items including, but not limited to the following:
• A list of all your assets (e.g., vehicles, savings accounts, stocks, RRSPs, and GICs) along with an estimate of each asset’s value.
• A list of all your liabilities (e.g., vehicle loans, credit cards, student loans) along with the balance owed for each.
• A letter from your employer confirming your employment including your income, position, and number of years with the company. Sometimes the lender may also request copies of T4 slips for the past couple of years. If you are self-employed you will need to provide notices of assessment and possibly tax returns and/or financial statements for the last two or three years, depending on the lender.
• Source of down payment funds. The lender will want to verify where the funds are coming from. If the down payment is being provided by family members, the lender may ask for a letter confirming the funds are a “gift” and do not need to be paid back.
• Personal information (i.e., social insurance number, as well as a source of photo identification such as a driver’s licence or passport).
Remember, if you are applying for a pre-approved mortgage with a spouse, family member, or