Pfanntastic Home Buyers Handbook Chapter 6 C. - Getting (Pre) - Approval for your Mortgage
In our journey towards buying your 1st home, so far we have covered.
- A broad overview in buying your 1st. Home
- Location, is Everything
- Selecting a Realtor
- Preparing to View Homes
- Watching the Market
- Financing Options
- Finding A Lender
Please review the previous chapters for more details in our Pfanntastic Home buyer Handbook Series, and or contact Peter of Linda Pfann.
Getting (Pre) Approval For A Mortgage
When applying for a Mortgage, you will have to bring the information listed in our previous chapter (Financing Options) to your lenders or mortgage brokers office, or if applying on-line, supply copies that are faxed to the lender. You will be asked additional questions that will help lenders determine if you are able to pay the loan back on time.
These questions include:
- Number of years renting a home or apartment
- Late payments on credit cards and other loans
- Active loans (such as student loans or car loans)
- Number of years at your current job
- Additional income
- Amount of the loan and number of years to pay it back
- Number of years living in an area
- Dependants that are living at your home
- Tax returns and bank statements, for employees; Notices of assessment and bank statements, and business records for the self employed .
Getting approval for a loan can take a week or more. This is because background checks, credit checks, and references must be checked first before the loan will be processed.
In the meantime, you should be concentrating on gathering your paperwork, calling friends and family that you want to use as references, and sorting through your papers in case you cannot find everything the lender requests.
If you do not have your back tax returns, you can contact the Canada Revenue Agency and request them by year. Many times, lenders will need to see returns from at least three years ago. Bank statements and bill statements from the past year should be enough to secure a loan.
If you are turned down for a home loan, you will be notified as to the reasons why. This can be devastating, but you could find other lenders and try to apply again. If you have poor credit, you may need to go through a lender that specializes in granting loans to those with poor credit. You may have to pay a higher interest rate, but at least you will be granted a loan.
Reasons for possible denial based on your personal merits include:
- Poor credit or not enough credit
- Length of time at your job is too short
- Income level for the amount of loan requested
- Loan default
- Failure to pay rent or other bills, or
- Too much credit
- Recent Immigrant
- Recent Divorce or Separation
- Recent Bankruptcy or foreclosure
Applying for a home loan can be stressful, but if you have good credit, steady employment, and enough income, you should have little trouble qualifying for a loan.
What Not To Do When Applying For A Home Loan
If you are serious about buying a home, there are a few things you should not do after applying for a home loan:
- DO NOT Buy a new car
- DO NOT Begin a new job (unless you are not working now).
- DO NOT quit your Job.
- DO NOT start a new business.
- DO NOT Buy new furniture, boats, TV's, Book Trips, Book Your Wedding, and other large items using your credit cards. Even when the store states "do not pay for any lenght of time"
- DO NOT Apply for a credit card, and or other forms of Credit, Loans or Advances
- DO NOT Default on student loans or other loans
- DO NOT Sign a Lease, rental agreement, or co sign oro guarantee for yourself or any other person.
- DO NOT apply for your mortgage at more than one lender and or broker at the time.
The above are very very important and I would urge you to remind yourself of these at every temptation, before you have moved into your new home. All of these actions will cause your credit score to change which will give lenders an inaccurate view of your spending habits and your overall credit score. If you take a job that pays less than you noted on your home loan application, your lender may not agree to grant you the loan. If possible, do not begin a new job until you have moved into your home. Try not to spend money on credit cards. Buy furniture and other items using cash, or wait until you have signed the final contract and are a homeowner.
Increase Your Chances For Approval
There are a few ways to increase your chances for loan approval that will also help you determine what you will be able to afford each month:
- Pre-approval - - Many experts agree that applying for a loan before you find a home and being pre-approved will help you create a budget, buy a home that is in your price range, and help lenders make their decisions faster.
- Ask for only the amount you will need - -One way to increase your chances for a home loan is to not ask for more than you will qualify for. This means you will have to look at your income level, the amount of debt you have, and the expected monthly mortgage payment. You should also factor in cost of living expenses, because your lender will. Apply for the amount you will need and nothing more.
- Pay off credit cards - - If you are thinking about buying a home in the next few years, you should prepare by paying off those credit cards and only using them for emergencies. Do not cancel your existing cards since this may actually lower your credit score. By showing you have a zero balance on your credit cards, you will be showing lenders that you know how to use credit wisely and you have been paying your cards off on time.
- Always pay bills on time - - This includes your electric bill, rent, student loans, and other bills that you may have to pay each month. By creating a track record that can be traced, you will be showing lenders that you are a responsible person who deserves to have a home loan.
- A Higher Down Payment - - Some lenders will grant you the loan if you agree to pay a larger down payment on the home and assume the financial risk. This is only an option if you can afford to pay a larger down payment. Do not risk your financial security in these cases; it is just not worth it.
- Find Another Lender - - This is a last resort move because it will postpone the closing for another month or so and there no guarantee that the lender will accept the appraisal.
How Appraisals can affect your mortgage application
Since home appraisals are required by most lenders, you should find out during the loan application process the policies that the lender has when dealing with appraisals. If your lender will not accept a lower selling price, you putting a larger down payment, or other solutions to a low appraisal, you should consider finding another lender just in case there are any problems down the road.
Home appraisals are based on the current value of homes in the neighborhood, homes that are comparable in size, the housing market, and the age of the home. While you can expect to hear different numbers from different appraisers, you will see that these numbers will usually not be too far off.
The only real benefit of a low home appraisal is that it will tell the homeowners to list the home for less money so that they will be able to sell it. In the meantime, you will have to find another home.
How Home Inspections Can Affect Your Home Loan
While a poor home inspection will usually not deter a lender from granting a home loan, you should be aware that some lenders will not grant a loan if there is termite damage or structural damage to the home due to water or age.
This will also lower the overall appraisal of the home, which could be another issue that lenders may have when deciding to approve a home loan.
If the home inspection is not favorable, ask your lender what will need to be done in order to rectify the problem. Many times removing the termites and correcting the water damage is all that will be needed. Many times homeowners will foot the bill for these types of repairs.
Keep also in mind that some insurance companies will require a copy of the inspection report as proof that the home is in an insurable condition, and off course home insurance is a condition of you getting financing, so if the home fails to meet up with the standards of the insurance company, this may very much affect your financing as well. We will cover this more in the chapter about home inspections (stay tuned or contact Peter of Linda Pfann)
Additional Fees For Home Loans
You may notice that you will have to pay small fees throughout your home buying experience. It seems that every piece of paper you sign, file, or request will cost you some money.
Here is a list of fees that you may be charged:
- Credit report fee
- Loan application fee
- Lender’s inspection fee
- Appraisal fee
- Loan origination or documentation fee
- Mortgage insurance fee often call CMHC fee
- Assumption fee
- Property insurance
- Annual Property Taxes (rolled in to your mortgage payment
- Title search, and
- Title insurance
These fees can add up, so you will want to be prepared and have a little extra in savings for when these fees come up. Some of these fees can be put off until the closing, but you should be planning for them in advance. A number of these fees and or charge, may be waived and or forgiven (ask for it, you never know) others are typically added to your mortgage payment.
Once your Mortgage is approved, you will be asked to sign a "commitment letter or if this was a Pre-Approval Application, you will likely get a letter indicating the mortgage level you are approved for, and for how long (typically 60 to 90 days) this can be important as mortgage rates as well as terms and conditions do change from time to time.
It is always good to know your options and we would encourage you to contact Peter or Linda Pfann, for any questions you may have about the various topics covered in this chapter and the choices available to you to finance and purchase your 1st home.
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