Mortgage Pre-Approvals and Rate Holds Explained
Before you begin searching for that forever home and looking to secure mortgage financing, you will need to know the home buying process. There are a number of steps involved in purchasing a home and unless you’ve been through the process before, it can be an overwhelming experience for many. Two common areas where home buyers often seem perplexed are mortgage pre-approvals and rate holds.
What is a mortgage pre-approval?
Before we get to the meaning behind a pre-approval, I’d like to briefly touch on the concept of a pre-qualification as it comes first in the home-buying process. Mortgage pre-qualification is a relatively straightforward step. All that is required is about 60 seconds of your time and our team at Boychuk Mortgages Group will be able to accurately pinpoint what you will likely qualify at based on your household annual income, debts, down payment, and credit scores. These details can be conveyed over the phone or through email where no in-depth analysis is required. Although there are many further variables taken into effect in the following steps to narrow in on exact numbers, a mortgage pre-qualification is a great method to quickly gathering a better understanding of your buying power before beginning the home buying process.
On the other hand, a pre-approval refers to what mortgage amount and terms a lender is willing to commit to prior to you officially securing a subject property. A mortgage pre-approval is based on an in-depth analysis of your finances and related factors. Once you’re pre-approved, you will see back the maximum amount you can afford to spend on a house. With that maximum purchase price, you will also have a better understanding of what your monthly mortgage payments will look like based off rates associated with your mortgage term and amortization. Just like a pre-qualification, a mortgage pre-approval is a free no obligation step that only benefits you, the borrower.
One of the big advantages to securing a pre-approval is what the industry calls a mortgage rate hold. Simply put, a mortgage rate hold locks in a rate at today’s competitive rates and protects you in the event that rates suddenly rise. Lenders will allow you to secure a rate hold on your pre-approval for up to 120 days. This means that the rate offered with your pre-approval will not change while shopping around for a house or deciding on whether you want to refinance or switch mortgage lenders.
Once you are pre-approved, the lender will send you a conditional commitment letter in writing for that specified maximum loan amount. Based on that amount, you can begin looking for a new home at that price point or less. A secondary advantage to securing your mortgage pre-approval is that which provides you an edge in negotiations. When a seller sees that you are pre-approved, this instates confidence in that seller that you’re serious about buying and have the necessary finances to back up your bid on their property.
How are pre-approvals done?
To get your pre-approval in place, it is as simple as contacting your mortgage broker directly. You will be asked a number of straight forward questions about your income, down payment, employment, and debt, along with your short-term and long-term goals. You will also need to provide supporting documentation to prove what you are saying. Based on the given details and your credit report, your broker will be able to outline a number of mortgage options to best suit your financial needs and goals.
Factors considered for pre-approval
There are four major factors that lenders consider in determining how much of a mortgage you can afford. Accompanied by those factors will be the rate associated to your specific application. These four factors are:
1. Down payment:
A down payment is the portion of the purchase price you’re willing to bear. It is a lump sum payment paid to complete the purchase. The minimum down payment in Canada is 5% on the first $500,000 and 10% on the remaining $500,000, up to $1,000,000. If you put down less than 20%, you will be required to pay mortgage default insurance (or CMHC insurance). This insurance ultimately is put in place to protect your lender in case you default on your mortgage. It is also important to note that the size of your down payment will affect your interest rate and the size of your monthly payments. Lastly, with a purchase over $1,000,000, you will be required to have a minimum down payment of 20%.
2. Credit score:
Your credit score is an indication of your financial health and how risky it may be to lend to you. Credit scores are calculated based on your credit history, the amount you owed, new credit, the length of your credit history, timely payments, and so on. If your credit score is high, that is, between 680 and 900, you may qualify with a conventional “A” lender (such as a major bank, credit union, or mortgage finance company). Credit scores between 600 and 680 will indicate that lenders need to look at other financial factors to determine if you can qualify on that same “A” side. Given that your credit score is what is holding you back from a conventional “A” mortgage, you will still have access to B lenders. B lenders often have a slightly higher rate, but allow you the opportunity to fix your credit over a short term in pursuit of getting you back into an “A” mortgage. If your credit score is below 500, you will require Private financing.
3. Debt service ratios:
Debt service ratios:These ratios are used to calculate the largest monthly payment you can afford. It is based on your current monthly income, expenses, and existing debt. Lenders calculate these ratios to ensure you can pay your monthly mortgage payments while coping with your personal expenses and other financial commitments.
4. Supporting documents:
The documents that you need to submit for a pre-approval are the same documents that you will need to secure financing on your forever home. These documents allow your broker to confirm your financial details, input them into the system, and get back to you with an accurate pre-approval. When the time comes to resubmit your application for approval, these documents will help make for a far smoother mortgage process in finalizing your application.
The main documents required for a mortgage include:
A. Identification (Canadian driver’s license or a passport)
B. Proof of income (Employment letter, 2 years of T4’s, a recent pay stub, and/or a notice of assessment if you are self-employed)
C. Proof of documents associated with buying or selling property.
D. Proof of down payment & finances to cover closing costs (recent bank statements and investment details)
E. Proof of assets
F. Proof of debts that may include, but not limited to credit cards, lines of credit, spousal or child support, student loans, personal loans, and/or car leases.
What does a rate hold mean?
As previously stated above, a rate hold refers to the process of locking in a specified mortgage rate for a limited period of time. Rate holds are offered by most lenders, provided you are a potential client looking for a mortgage. If you’re interested in a mortgage refinance or a transfer to another lender, you will also be eligible for a rate hold. If you do qualify for a rate hold, here’s what you must know:
1. Rate holds are only offered for a period of ninety to a hundred and twenty days from the day you submit your application. That means you have only ninety to a hundred and twenty days to shop for that forever home before the rate potentially fluctuates.
2. You don’t have to commit to a lender when you ask for a rate hold. Similarly, it doesn’t affect your future chances of a mortgage approval. It is simply a guarantee that the rate quoted will not change for a fixed period, hence allowing you the choice to take advantage of that rate once you locate your ideal home.
3. A rate hold is also beneficial as it helps you protect yourself against volatile markets. On one side, your rate hold will allow you to worry less given that rates suddenly did rise, where on the other hand, if the rate fell, you would be able to take advantage of those lower rates.
4. Finally, if your rate hold expires, you can always submit a request for an extension. Given certain circumstances, your lender will allow you to extend your pre-approval given rates have not risen. If rates have risen in that time frame, you will be subject to those new rates on your next pre-approval.
Now that you can differentiate between a mortgage pre-approval and rate hold, it should be easier to navigate through the home buying process and take advantage of the tools at your disposal. As a renowned mortgage company with a broad spectrum of lender connections, we pride ourselves on helping our clients secure their ideal mortgage, improve their credit scores, and save them a pile of cash with the very best mortgage rates and terms.
Ultimately, it is essential to work with a mortgage broker that you can trust. We at Boychuk Mortgages Group know how to simplify your mortgage journey and offer you a stress-free process from start to finish. Given our expertise and experience in the industry, we offer our clients all of the information needed to make an educated decision that best suits your financial needs.