The trouble is that by then you're emotionally attached, and any financing surprise lands at the worst possible moment. Doing the money side first means you shop with a realistic budget, write a stronger offer, and have fewer late-stage scares. Here's how to get ready.
Step 1: Know the difference between a pre-qualification and a pre-approval
A pre-qualification is an estimate based on what you report: income, debts and down payment. It's quick and useful for a first look at your budget, but it's only as good as the numbers you put in.
A pre-approval is more thorough. A lender or mortgage broker reviews your documents and credit and gives you a maximum amount, often with a rate hold for a set period. How thorough it is varies, so ask whether your income documents and credit were actually reviewed.
Neither one is a final approval. Once you have an accepted offer, the lender still has to approve you on that specific property, which may include an appraisal.
Step 2: Work out your down payment
For an insured mortgage, the minimum down payment is 5% on the first $500,000 of the price and 10% on the portion above that, and mortgage loan insurance is available on homes priced under $1.5 million. Lenders usually require that insurance when you put down less than 20%, and you can pay the premium up front or add it to your mortgage (see the FAQ on insured and uninsured mortgages).
If you're a first-time buyer, ask a financial professional about the First Home Savings Account (FHSA) and the RRSP Home Buyers' Plan. The Canada Revenue Agency's FHSA page explains the current rules.
Step 3: Make your down payment easy to trace
Lenders need to see where your down payment came from. Keep it in your own account, have recent statements ready, and if a family member is gifting part of it, ask your lender early what paperwork they'll need. If your funds are coming from outside Canada, talk to your lender well before you make an offer, because moving and documenting money from abroad takes time.
Step 4: Gather your documents now
- Recent pay stubs and an employment letter, if you're employed.
- Lenders often ask for your last two years of tax returns and notices of assessment, especially if you're self-employed, earn commission or have variable hours.
- Recent statements for the accounts holding your down payment.
- Details of any debts: car loans, lines of credit, student loans, support payments.
Step 5: Keep things steady until you get the keys
Between approval and completion, check with your lender before you change jobs, take on or co-sign any new debt (including a vehicle loan), apply for credit, or close accounts. Keep paying every bill on time.
Step 6: Think about the property, too
Financing isn't only about you. Lenders look at the home itself. A property that needs major work, an unusual rural property, or a strata with a thin reserve fund can all raise questions. For condos and townhouses, read the Form B and the depreciation report, which must be attached to it if the strata has one.
Pros and cons of getting pre-approved early
Pros
- You know your realistic price range before you fall for a home.
- You can write a cleaner offer and move faster when the right home comes up.
- Problems with credit or documents surface while there's still time to fix them.
Cons
- A pre-approval isn't a guarantee, and it can give a false sense of certainty.
- Rate holds expire, so if your search drags on, you may need to update it.
- Your maximum isn't necessarily a comfortable payment. Leave room for property taxes, heating, strata fees, maintenance and life.
The bottom line
Talk to a lender or mortgage broker before you start viewing homes, not after. Knowing your number, having your documents ready and keeping your finances steady will make the whole process calmer.
Planning a purchase in Vernon or the North Okanagan? Call or text Sean Phillips, REALTOR® with Coldwell Banker Executives Realty, at 236-599-5898. The move countdown planner shows when each of these steps fits.
This article is general information, not financial or mortgage advice. Talk to a qualified mortgage professional about your situation.