Many home buyers find the mortgage application and approval process confusing. Because of this, we have prepared this guide so that you know what to expect at every step of the way.
Complexity is a reflection of preparation – how well prepared you are as a buyer.
When it comes to being prepared, the timeline covers understanding the mortgage application process, gathering all the required documentation, and finding out exactly what kind of mortgage you want, including the amount of mortgage you needs, and the rate you are looking to get.
Before you go out looking for homes, you need to find out how much you can afford.
First rule of thumb (rule of 33)
The first rule of thumb is your monthly housing costs (including the mortgage payment) should not exceed 1/3 of your monthly income.
This means if you have a family income of $10,000, the maximum you should spend on housing costs is 33% * $10,000 = $3,300.
I know, you might be wondering, how about just the mortgage payment?
Second rule of thumb (rule of 28)
Your monthly mortgage payment should not exceed 28% of your monthly income. Using the same previous example 28% * $10,000 = $2,800 maximum mortgage payment.
How about if I have a lot of debt?
Third rule of thumb (rule of 40)
If you can afford a mortgage payment of $2,800, but before buying the home you go out and buy a car with a monthly payment of $400 per month, now you cannot afford $2,800 per month on the mortgage, but a lower amount
The third rule of thumb is the amount you pay on all your debts (including your monthly mortgage payment) cannot exceed 40%. Again, using the previous example 40% * $10,000 = $4,000 is the maximum you can spend to service all your debts, including the mortgage payment.
Remember, these ratios may vary based on which lender you choose or the level of your risk profile.
Does the mortgage interest rate affect what I can afford?
Yes, it does! This is where it gets interesting. There are also other factors that influence how much mortgage you can afford, including.
For a practical way to find out how much house you can afford you should use our home affordability calculator.
The better your credit score is, the easiest it will be for you to negotiate a great mortgage – one that you can afford, and be happy with.
Lenders will use your credit report to determine your creditworthiness. So, make sure your credit report is accurate, up to date, and in the best possible shape.
Many buyers skip reviewing their credit report simply because the lender will also pull the credit report. The truth is, if there are issues with the credit report, you’ll find yourself in a vulnerable position, and at the mercy of the lender.
It’s better to negotiate from a position of power (knowledge) than from a position of ignorance.
According to a study conducted by the Bank of Canada, and other similar studies conducted in the USA, average mortgage applicants that hired a mortgage broker received better rates than mortgage applicants that got a mortgage directly with their bank.
Translation? We recommend you hire a mortgage broker at least so that you can compare the rates a mortgage broker can get you vs. a quote you may have obtained directly from your bank.
If you decide to negotiate with lenders yourself, read about the different types of mortgages being offered in the market, the best rates being advertised by various lenders, and use tools available on this site to find out how much you can afford.
The most important part of the mortgage application process is finding out your options.
Know what you want.
For example, you want a fixed, 30-year open mortgage at a rate of no more than 2.8%. This is just an example, but before you talk with a lender or apply for a mortgage, you have to know what you are looking to get.
Taking an online home buyers course can be your secret weapon in achieving successful homeownership. It can also save you from a bad home buying experience and make you a savvy home buyer.
Here are some of the benefits of taking our home buyers online course.
When it comes to selecting lenders, loyalty can be expensive. To find good deals you have to shop around.
When it comes to mortgages, shopping around for a better rate can save you tens of thousands of dollars over the mortgage term. Yet, over 50% of people never shop around for a better rate.
As Richard Thaler, the winner of the 2017 Nobel Price in Economics, points out, when evaluating options that require careful consideration, consumers get confused and opt for the easiest option available. And for that, they pay the price.
However, shopping around is much easier than you think. All you need to do is ask for a number of options and then ask to be granted the best option. That’s it.
Whether you are buying for the first time or not, the goal is to make the process as fast and efficient as possible.
The specific documents you’ll need depends on your situation; for example, someone with full-time employment will be required to provide an employment letter and salary statements, while a self-employed person will be required to submit copies of their income tax returns.
Many people ask me, “Why do I need to worry about mortgage documents are this point if I haven’t even bought the home yet”?
Perhaps your boss is out of town on vacation so there is no one to sign your employment letter or the lender asks for copies of your tax returns for the last two years, but you can’t find a copy or never got around to do your taxes. That’s not fun!
Organizing the supporting documents before you submit the application will make the mortgage approval process go smoother, and faster, giving you a pleasant experience.
A mortgage pre-approval is not an approval. With a mortgage pre-approval, the lender reviews your income, assets, your debts, and your general financial situation to determine if qualify as a good candidate, but the lender does not confirm most of the information you provide.
The benefits of a mortgage pre-approval are to allow you to narrow your home search by giving you a good idea of what you can afford or potentially be approved for. If you skip the mortgage pre-approval process you might end up making an offer on a property that you cannot afford.
To find a good lender, you have to shop around. To get the best deal you must negotiate. Now what I want you to do is the following:
If you are not comfortable negotiating with lenders, hire a mortgage broker, and follow the same game plan.
The mortgage commitment tells you the lender is willing to lend you the money to fund the purchase of a home. If you have reached this stage, generally it means your credit check and other information you provided to the lender are in accordance
An approval or commitment letter usually contains this basic information:
Conditions for the approval:
Since a mortgage commitment is not a final approval, there are conditions you will need to meet to make it final. Those conditions can include:
Getting mortgage pre-approved is a smart step. Don’t assume you qualify for a mortgage; and if you buy a home without a mortgage pre-approval be sure to include a mortgage financing condition on your offer.
When you are pre-approved for a certain amount, you can start the house hunt confidently knowing what your price range is.
We have written extensively on how to achieve successful homeownership. You can read more by checking our How to Buy a Home Guide.
You can also download our House Hunting Checklist
After you submit the application, you will need to submit supporting documentation that proves the accuracy of the things you disclosed on the application such as your income, your debts, and more.
Typically the mortgage process takes a bit longer for applicants with more complicated employment history or income profiles.
Your application then will go through a risk assessment review (underwriting). As part of this review, the lender will verify the documentation you provided against information from the application, and various other checks will also be carried out including contacting the place where you work.
Before final approval, most lenders will pull your credit report again to review if there are material changes on your credit file, so remember to avoid making additional big purchases during the mortgage approval process.
Lenders want to make sure you are not paying too much for the property; therefore, a home appraisal will be ordered by the lender.
Depending on the type of market, some appraisals are done as “desktop” appraisals (done remotely by an underwriter), and some appraisals could be ordered to be done in person by a qualified home appraiser.
The lender will then get an appraisal report that confirms the approximate market value of the property. If the approximate market value of the property is close to the amount of your offer, and all else checks out, your loan will be approved.
To learn more about the home buying process, including the mortgage application process we recommend you take our New Home Buyers’ Online Course.