For a first-time home buyer, the Canadian mortgage process can be daunting. You may have heard terms such a pre-qualify, pre-approve and condition of finance. You may wonder how these apply to you and your home purchase. However, if you break the mortgage process down into its steps, it becomes more understandable and less intimidating.
Can I Afford a Mortgage?
The first step is to sit down and decide if you can afford a mortgage and, if so, for how much. As a rule of thumb, you can pay up to 32% of your income for housing costs and up to 40% for all your debts, including other loans. You also need to have a good credit score and be able to make a down payment.
If you'd like some help, many mortgage lenders and brokers will ask you a few questions and tell you the dollar figure they think you can afford. Some of them call this process pre-qualification. It isn't a commitment on their part, but it's useful.
Pre-approval is a more rigorous process. You'll fill out a formal application and submit several financial documents to prove your asset level, employment, and ability to make payments.
You may seek pre-approval directly with a mortgage lender or through a mortgage broker. A mortgage broker does not lend directly but shops with many mortgage lenders to get good terms for you. Be aware that some mortgage providers don't offer loans through brokers, while some products are available only through brokers.
Key factors in the pre-approval process are:
- Income. Can you pay the new mortgage as well as your current debts?
- Credit. How well have you historically fulfilled your financial obligations? What's your credit score?
- Down payment. How much cash will you pay upfront?
- Assets. Do you have other assets that help ensure you'll meet the obligation?
If your pre-approval application is okayed, you will have an interest rate and a maximum loan amount. The pre-approval will be valid for a fixed period of time, typically about 90 days. A pre-approval is still not a commitment on the lender's part, but it tells a seller that it's highly likely that you can get the mortgage you need.
Selecting a Property
With your pre-approval, you're in good shape to start shopping for a property. When you find one you like and agree on a price with the seller, things can proceed to closing pretty quickly. The seller gives you a specified period, often called a “condition of finance,” to finalize your loan approval. 5-10 days is typical.
Next, the lender completes the underwriting process and issues the final approval. Assuming nothing has changed in your financial or employment status since the pre-approval, this can be a quick process and often happens within 48 hours.
The lender issues a commitment that your loan has been approved. There may be some other requirements, such as a property appraisal. Any conditions on your offer of purchase are fulfilled, and you can proceed toward closing.
During this stage, your lawyer and your lender work together to register the mortgage and transfer the property title. You'll sign all the necessary papers, pay your down payment and closing costs, and provide proof of insurance. This can last 7-10 days. You're not quite home yet. It's still important that your financial and employment status are stable; the lender can still back away from the deal.
Funding & Possession
It's the big day! All the funds are transferred to those who should receive them. Your name goes on the title, and you get the keys. Welcome to your new home!
By Justin Havre