Congratulations! You've decided that you're ready to become a homeowner. But with the average Canadian home prices exceeding half a million dollars,* it's likely that you'll have to take out a mortgage in order to close on your dream property. Luckily, current interest rates are fairly low, making borrowing more affordable.
Before you even go house hunting, the first step in the process is to get pre-approved for a mortgage.
A mortgage pre-approval means that the lender has qualified you for a certain loan amount based on your current financial situation. It's not a guarantee that you will get the funds though. Once you settle on a home, you'll still have to go through a final approval process, but the pre-approval should give you a good amount of confidence that you will qualify for the amount indicated in the pre-approval. It also locks in your rate for typically 60 – 130 days, which means that you can rest easy even if rates go up during that time period. (If rates go down, don't worry, you can still get the lower rate).
The pre-approval process can take a few days or up to a few weeks. This approval time can be cut down to just minutes if you opt to apply for a pre-approval online with Scotiabank’s online mortgage hub eHOME. You will have to provide your lender or broker with some personal information and documents. These can include:
- Government identification
- Proof of income (usually a pay stub if you are employed or notices of assessment if you are self-employed)
- Proof of a down payment or ability to cover closing costs
- Length of time with your employer
- roof of any other assets
- Information about your other debts - particularly how much you owe and pay monthly on them
The lender may perform a hard credit check. If you have a permanent job with an employer, the application is usually quite straightforward, but if you have multiple jobs or are self employed, you'll have to provide more documentation.
During the pre-approval process, ask your lender to clarify any questions that you may have. Some questions to ask may include:
- How long do you guarantee the pre-approved rate (usually between 60 to 130 days)?
- Will I automatically get the lowest rate for the selected term if interest rates go down during the preapproval process?
- Is it possible to extend the pre-approval?
Getting mortgage pre-approval online
Luckily, it's never been easier to get pre-approved for a mortgage. You can now do the entire process from the comfort of your own home.
Take Scotiabank's online mortgage hub eHOME for example.
The pre-approval application itself can take just minutes. You can download and print your pre-approval letter with exclusive online rates. Once you've made an offer, you simply submit your full mortgage application with all your documents through eHOME. You never need to visit a branch** and you can track the status of your application online.
What you think you can afford and how much your lender is willing to give you can sometimes be very different. You want to make sure you have a full understanding of how much you are pre-approved for early in your home buying journey. Those with low credit scores, self-employment under three years or other kinds of debt may find it more challenging to get pre-approved for the amount they want.
Some realtors won’t take you house hunting until you go through the pre-approval process, because you need to first know what you can borrow in order to look at houses in your price range. Getting pre-approved will help you narrow down your search and find a home that will work in your financial plan.
You can figure out roughly how much of a mortgage you can afford by using the same calculation the banks use to qualify you. The maximum amount you can borrow is based on two formulas: the Gross Debt Service (GDS) Ratio and the Total Debt Service (TDS) Ratio. For the GDS, no more than 30 to 32% of your household's gross annual income should go to housing expenses, including the mortgage payment, property tax, condo maintenance fees and heating. For the TDS, your debt repayments should not exceed 37 to 40% of your household's gross annual income. Debt repayments include mortgages, credit cards, car loans and personal loans.
If you’d like to understand what you can afford, try out Scotiabank's mortgage calculator available through eHOME. It only takes a few seconds and you don't need to fill out an application to access it.
If you don't meet the qualifications to borrow as much as you need for a property, some options to consider are looking to reduce your debt, increasing your down payment or searching for lower-priced property. If you're worried that you won't qualify because you're a newcomer to Canada or a temporary resident, then Scotiabank offers special mortgage products suited to your needs.
Once you have gotten your mortgage pre-approved, your lender will tell you details about the home loan they think they will be able to provide you, with the selected mortgage term and rate, and you will be protected for around 60 to 130 days against interest rate increases. You can then use that pre-approval to start shopping for a new home.
When you request a mortgage pre-approval, a lender will generally do a hard credit check to get access to your credit score. This will lead to a notation on your credit record which can slightly impact your credit score for up to 36 months.
The good news is that multiple inquiries from different lenders during a short period of time will only appear on your credit history as one inquiry – allowing you to shop around for rates without worrying. You have between 14 days to 45 days to make those multiple inquiries for them to only be counted as one inquiry – depending on the credit scoring model being used.*** For that reason, it's important to plan before shopping for a mortgage.
Since 2018, Canadians have had to undergo a stress-test to qualify for a mortgage. As houses have gotten more expensive, the government was concerned that Canadians were taking on bigger mortgages than they could afford and that if interest rates were to rise, then Canadians would no longer be able to afford their mortgage.
Federally regulated lenders need to make sure that your income will not only support your mortgage payments at the current interest rate, but also if rates rise. If your down payment is 20% or more, your qualification depends on if you can afford your mortgage payments at your mortgage contract rate plus 2%, or at the Minimum Qualifying Rate, whichever is higher (this only applies to uninsured mortgages). If your down payment is less than 20% (meaning mortgage default insurance will be required) your qualification depends on if you can afford your mortgage payments at your mortgage contract rate or the Bank of Canada’s current Minimum Qualifying Rate, whichever is greater. This is a strict standard, but it helps to have this built-in cushion.
Ultimately getting that letter that you've been pre-approved for a mortgage is an exciting one. Now you can move on to the next phase of your home-buying journey and start looking seriously at properties, with a clear idea of how much you can afford.
Legal Disclaimer: This article is provided for information purposes only. It is not to be relied upon as investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this article, including information relating to interest rates, market conditions, tax rules, and other investment factors are subject to change without notice and The Bank of Nova Scotia is not responsible to update this information. All third party sources are believed to be accurate and reliable as of the date of publication and The Bank of Nova Scotia does not guarantee its accuracy or reliability. Readers should consult their own professional advisor for specific investment and/or tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.
All Scotiabank mortgage applications are subject to Scotiabank’s, and if applicable, the mortgage default insurer’s, standard credit criteria, residential mortgage standards and maximum permitted loan amounts.
** You are required to meet with the lawyer who is completing the purchase of your home to sign documents and obtain the keys.