Looking for more information about your pre-approval appointment?
The first step you should consider in your home buying journey is getting a pre-approval. Your pre-approval gives you a maximum that you can be approved for and the kind of terms you should expect. It is important to note that a pre-approval is not a guarantee of mortgage approval. A pre-approval will also provide you with an estimate of your monthly mortgage payment. Your pre-approval allows you to lock in an interest rate for up to 120 days. This makes the process of applying for a mortgage easier for both the borrower and the lender. Having a pre-approval will also increase your confidence when shopping for a new home.
Is it time for a pre-approval appointment?
Now that we understand just what a pre-approval is and why it is important, we can discuss that all-important pre-approval meeting.
During your mortgage pre-approval meeting, you will meet with your mortgage broker to discuss your financial situation. This is done by reviewing your income, debts, assets, and overall creditworthiness. As mentioned before, this is a rather involved process, so the more information you can bring to the table, the better prepared you will be. Involved does not necessarily mean scary. If you know what to expect during your pre-approval meeting, you will be able to make the most of your first mortgage appointment while also kicking your anxieties to the curb.
What should I expect?
When you go in for your pre-approval appointment, the goal will be to assess your financial readiness for a mortgage. Essentially, can you afford to buy a home?
Your unbiased mortgage professional will, either in person or virtually, sit with you to discuss your situation. The first indicator of financial well-being will be your income. Your mortgage broker will determine this by going through your paystubs. This will help them determine the amount and reliability of your income. Your income can also be confirmed through T4s and your bank statements.
Bank statements can assess more than your income. Your mortgage broker will be able to review your bank statements and get an idea of your cash flow. Your cash flow considers the money you receive as well as the expenses you pay for. However, the bank statements really become useful when confirming your assets, better known as your savings. It’s here that your mortgage broker can confirm that you not only have enough for the down payment on your new home, but that you can also cover closing costs.
It’s all about your cash flow
Now that you’ve confirmed that you have a regular income and that you can cover the out of pocket expenses associated with buying a home, your mortgage professional will want to look at your debt service ratios. This is really just a measure of cash flow and ensures that you have enough income to cover expenses. It is also important to have some money left over for emergencies and other unexpected expenses.
There are two key debt service ratios. The first is your gross debt service ratio (GDS). Your GDS is the percentage of income that is needed to cover your mortgage payment, property tax, and heating costs. The second is your total debt service ratio (TDS). Your TDS is the percentage of income needed to cover all of your debt obligations.
When examining your debt service ratios, the goal is to ensure that you are near or below the acceptable thresholds (39 per cent for GDS and 44 per cent for TDS). Strong debt service ratios – lower percentages – improve your ability to qualify for a mortgage, and will impact the amount lenders will loan you. If you are looking for more information about debt service ratios, you can read one of our recent blog posts on debt service ratios here.
Your credit score matters, too
Once you determine that you fall within the acceptable parameters, it’s time to review your credit score. This will tell your mortgage broker, and the lender, the likelihood of you being able to consistently make your mortgage payments. Here, your mortgage broker will assess your payment habits. In addition, they will review your credit history, debt, and the types of credit you have experience with.
Your credit report will show if you have recently applied for credit, as well as your credit habits. Similar to your debt service ratios, there is an ideal range you will fall in. A good credit score is 680 and above. If your credit score is below 680, it might limit the options you have to get approved for a mortgage. Do not fear though, your mortgage broker will review your situation and let you know what options are available. Sometimes it’s a good idea to get on a credit rebuilding plan and build up your creditworthiness before applying for a mortgage. If you would like to read more on how your credit report is calculated, you can read one of our recent blog posts on the topic here.
Now what?
During your pre-approval appointment, we will discuss your income, bank statements, debt ratios, and your credit report. By looking at your overall financial picture, your mortgage broker can confidently assess your financial readiness to take on a mortgage! If you are in the market for a new home and are wanting to apply for a preapproval, or discuss your options further, give me a call at (705) 333-4338 or get in touch with me here!