STEP ONE OF THE BUYER PROCESS: Finding out what you can afford.
What property can I afford?
Ah, the house hunt. It is by far the most exciting step in the buying process. But it’s actually not the first step.
Before looking for a home, you want to ask yourself, “What property can I afford?” And the only way to figure out what you can or cannot afford is to set your home-buying budget based on the maximum amount available from lenders. Once pre-approved, your North Group expert can help you determine the neighborhoods and the different home types in your price range for a more focused home search.
But first, mortgage pre-approval is the key step in understanding what properties you can afford.
MORTGAGE PRE-APPROVAL: WHERE DO I START?
Knowledge is power. Therefore, understanding everything that impacts qualifying for a mortgage is a smart place to start. Here’s what you should consider:
Income vs. Expenses
Your monthly income vs. your expenses provides your expense-to-income ratio. If your ratio is 32% or lower, you have a better chance of pre-approval.
Lenders aren’t fans of debt. Owing no more than 40% of your gross income will help you qualify for mortgage pre-approval.
Your Credit Score
Lenders tend to provide pre-approval to buyers with high credit scores of 700+. If your score is between 650 and 700, you can still get approved, but your interest rate won’t be as low as those over 700. Scores below 650 can still qualify, but usually require a higher down payment and include higher interest rates. This is because lenders view lower scores as higher risks.
Mortgage Stress Test
Banks measure your income against either their best rate plus two percentage points or 5.25% interest, depending on which is higher. This makes it harder to qualify.
120 Day Lock-in
Once pre-approved, most lenders lock in your interest rate and mortgage approval amount for 120 days. If interest rates drop, you still get the lower rate, so it’s worth getting pre-approval before you start your house hunt.
Your down payment is based on the price of the home. Here’s how much you’ll need:
• 5% of the purchase price for homes $500,000 or less
• 5% of the first $500,000 of the purchase price and 10% for the balance over $500,000 for homes $500,000 to $999,999
• 20% of the purchase price for homes $1 million or more
Based on current housing prices, you’re likely looking at more than a 5% down payment.
WHERE TO GET MORTGAGE PRE-APPROVAL?
Mortgages are available through banks, credit unions, mortgage companies, insurance companies, trust companies, and loan companies.
That’s a lot of options. It’s not a bad idea to start at your bank. But don’t settle on a mortgage without seeing what else is available. When you go to any one lender, they only show you the mortgage products they offer.
A mortgage broker, on the other hand, considers all the mortgage products available and recommends the ones with the best terms and rates based on your financial situation. Choices allow you to make an informed decision. Need help? Reach out and we can also introduce you to one of North Group’s preferred partners.
WHAT PAPERWORK WILL YOU NEED TO PREPARE?
When applying for approval, you’ll feel less stressed if you’re armed with accurate information, including:
• Valid government identification
• Proof of employment such as recent pay stubs or a letter from your employer
• Two most recent notices of assessments from the CRA as proof of income for the self-employed
• Proof you have the savings for your down payment and can cover closing costs
• A list of your assets
• A list of all debts and financial obligations, including account numbers
Speed up the process and avoid delays by getting this information ready ahead of time.
Even if mortgage pre-approval feels impossible, we always say it’s best to bite the bullet and get it done. It’s the first necessary step in your home-buying process.
Have more questions about the process? Shoot us an email and one of our North Group experts will be happy to help.