Buying your first home: Three steps to successful mortgage shopping

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Step 2: Shop around and get pre-approved

Understanding the pre-approval process

A pre-approval is a preliminary discussion with a potential mortgage lender to find out the maximum amount they will lend you and at what interest rate. With a pre-approval, you can do the following:

  • Lock in an interest rate in case interest rates rise before you purchase a home. The length of the interest rate guarantee varies by financial institution and usually ranges from 60 to 120 days.

    If interest rates fall before you purchase a home, you may or may not be able to get the lower rate, depending on the lender’s policies for pre-approvals.
  • Estimate your mortgage payment, so that you can include it in your budget.
  • Know the maximum amount of a mortgage that you qualify for, so that you don’t waste time looking for homes that are too expensive.

A pre-approval does not guarantee that you will get the mortgage loan. Once you have a specific home in mind, the lender will want to verify that the home or property meets certain standards (such as the condition or market value of the home) before approving your loan. At that point, the lender could decide to refuse your mortgage application, even though you had received a pre-approval for a certain amount. 

What to consider when you are shopping around and getting pre-approved

Keep in mind that the pre-approved amount is the maximum you could receive. It may be a good idea to look at homes in a lower price range so that your budget will not be stretched to the limit. Remember to include in your budget any additional costs you expect in the near future, such as starting a family or buying a car. Also remember to factor in closing costs and moving costs.

When you shop for a mortgage, compare the whole package each lender offers: whether the mortgage is registered with a standard charge or collateral charge, interest rates as well as features and services that are important to you, such as the ability to make lump-sum prepayments or to increase your regular payments.

Don’t underestimate a small difference in interest rates between offers. A difference that might seem small, such as half a percent, can add up to a significant amount of interest over the length of a mortgage.

Remember that interest rates are often negotiable. Don’t accept the first offer made to you. Make sure you have explored other offers to find one that best meets your needs.  

Where can you get pre-approved?

You can get pre-approved by mortgage lenders or mortgage brokers.

Mortgage lenders

Mortgages are available from several types of lenders, such as:

  • banks
  • mortgage companies
  • insurance companies
  • trust companies
  • loan companies
  • credit unions, and
  • caisses populaires.

Different lenders may have different interest rates and conditions for similar products. Talk to several lenders to make sure you’re getting the best product for your needs. You will also get a feel for the lender and you will be able to determine which one you would rather have the long-term relationship with. Although you can decide to switch lenders later, it is important to be comfortable with the lender and the mortgage options offered to you right from the start. 

Mortgage brokers

Another option is to talk to a mortgage broker. Rather than lending money directly to you, brokers arrange transactions by finding a lender for you. Since brokers have access to a number of lenders, they may give you a wider range of mortgage products and terms to choose from.

However, mortgage brokers do not all have access to the same lenders, so the available mortgages vary from broker to broker. When you are considering a mortgage broker, ask which lenders they deal with.

Some lenders only offer their products directly to borrowers, while some mortgage products are only available through brokers.

Mortgage brokers generally do not charge fees for their services. Instead, they usually receive a commission from the lender when they arrange a transaction.

To get a list of mortgage brokers in your area, visit the website of the Canadian Association of Accredited Mortgage Professionals, or call them toll-free at 1-888-442-4625.

Mortgage brokers are provincially regulated. If you want to confirm that a broker is licensed, or if you have a complaint, contact your provincial government.  

What you should bring to a pre-approval interview

When you are speaking to a potential mortgage broker or lender, it is a good idea to have the following information handy:

  • identification
  • proof of employment
    • proof of current salary or hourly pay rate (for example, a current pay stub and a letter from your employer)
    • position and length of time with the organization
    • if self-employed, bring your Notices of Assessment from Canada Revenue Agency from the past two years
  • proof you can pay for the down payment and closing costs
    • recent financial statements (bank accounts, investments)
  • information about your other assets, such as a car, cottage or boat
  • information about your debts or financial obligations
    • credit card balances and limits, including those on store credit cards
    • child or spousal support amounts
    • car loans or leases
    • lines of credit
    • student loans
    • other loans.

Questions to ask

  • Do you automatically get the lowest rate if interest rates go down while you are pre-approved?
  • How long is the pre-approved rate guaranteed?
  • Can the pre-approval be extended?

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