If you’ve been thinking about buying a home in Canada, you’ve likely heard the term “mortgage preapproval,” but you may not understand its limitations. A mortgage preapproval involves a detailed analysis of your financial situation to determine if you qualify for a home loan and if so, the amount. This helps you better understand what level of financing you can qualify for before you begin looking at houses. Being preapproved shows sellers that you’re a serious buyer with a very high chance of getting a mortgage, so they won’t need to worry about your financing falling through.
But what if you get preapproved for a mortgage and it doesn’t quite measure up to the amount you were hoping for? If you find yourself in this position, just know that mortgage preapprovals are temporary. Once you’re approved, you’ll have roughly 60 – 130 days to close on a home purchase and sign a mortgage agreement. If you weren’t satisfied with your preapproval amount and would rather wait to home shop so you can increase your preapproval amount next time you apply, there are a few tips you’ll want to take note of:
Tips To Increase Your Preapproval Amount
Save more money for a larger down payment
One of the most important factors when it comes to qualifying for a mortgage is how much you plan to put down upfront. In Canada, every property purchase will require a minimum cash down payment that ranges from 5% – 20% of the purchase price. If you’re looking to buy a more expensive home, you’ll require a larger minimum down payment as a result. While saving up a lot of cash in advance can be a difficult task, it’s one that is mostly within your control as you can complete it on your own timeline and budget.
Pay off as much of your existing debt as possible
Your mortgage lender will be looking closely at your debt-to-income ratio to determine how much of a mortgage you can handle given your current financial situation. The more money you owe other lenders (loans, credit cards, etc.), the less that’s available to make payments on a mortgage and the more a lender will have to risk to ensure you don’t default. If you want to get preapproved for a larger mortgage, take the time to set aside part of your budget for debt repayment so when you reapply, you know you have a lower debt-to-income ratio.
Improve your credit score
The first step toward improving your credit score is to understand it. This number plays a huge role in your overall mortgage experience. If you have a low credit score, lenders will undoubtedly charge a higher mortgage rate. Before you start house hunting, give yourself time to learn more about how your credit score affects your mortgage and take the necessary steps to improve your credit score if needed so that you can get access to better rates.
Increase your income
Aside from paying down debt to free up more of your money on a regular basis, increasing your income can help you get access to a higher value mortgage. Whether you ask your employer for a raise, consider finding a new job that pays more or explore an additional source of income (side jobs, a hobby you can monetize, etc.), the key is to prove that your source(s) of income are reliable and stable.
Shop around for a lower mortgage rate
Getting access to the best possible mortgage rate you can will result in a lower overall mortgage payment each month, which in turn, reduces your overall cost as a homeowner. In order to ensure you get access to the best rates, taking the necessary steps outlined above is critical. Compare your options with different lenders and don’t be afraid to shop around before you choose a lender to preapprove you. The terms and conditions of each mortgage are also important to consider during this review process as the type of mortgage you opt for (open, closed, variable/fixed rate) will have an impact on how much you’ll pay over time.
Consider finding a co-signer
While this isn’t an ideal option, especially for the co-signer, finding someone to sign their name on the dotted line with yours can help boost your preapproval amount, especially if that someone has a high income. If you plan to take this route, or even explore it loosely, it’s important to understand what role the co-signer will play and what you’ll really be asking of someone when you approach them about this option.
Seek out longer loan terms
The longer your mortgage term is, the more stretched out your mortgage balance becomes. This means you’ll pay less each month and endure less of a financial burden. Speak to your lender about increasing the term length and see if adding more time to your loan period will allow them to lend you more money toward a mortgage.
Set a realistic budget
Knowing what you can afford before you enter the preapproval process is very important. Just because you can be preapproved for a specific amount doesn’t mean that your personal budget will support that amount – you likely have expenses that are not reflected in a credit report. Take the time to hash out your monthly fixed and variable expenses and determine how much you’ll need to set aside above and beyond those primary mortgage costs.
How Much Can I Get Preapproved For?
When it comes to loan amounts, there’s no one-size-fits-all number. In order to get preapproved for a mortgage, you’ll need to meet with your broker or lender and provide a variety of documentation regarding your income, debt, assets and more in order for them to assess what amount you can manage based on your current financial situation.
How Is That Determined?
In order to get preapproved for a mortgage you’ll need to provide proof of income, assets, employment, and any other important documents the lender may require. This could include recent bank statements and even your latest tax assessment. Keep in mind that the amount you’re approved for is derived based on financial data from all these documents as well as your credit score, which can have a big impact on your eligibility for a mortgage. If you don’t have a good credit score, lenders can refuse to approve your mortgage altogether. The required credit score for a mortgage approval in Canada ranges between 300 – 900, but the minimum credit score required by most major banks in Canada is 600 – 700.
Understanding what criteria lenders look at to determine your mortgage preapproval amount, will also help you learn what not to do when in the midst of applying for a mortgage.
How Much Can I Afford?
The monthly mortgage payment you can afford will depend entirely on your personal financial situation. The mortgage preapproval process exists to help lenders and borrowers determine how much house someone can afford while considering all of the necessary factors.
If you’re curious to learn more before speaking with a lender, you can use our free calculators to help you better understand how much money you can afford to spend on a mortgage each month.
Increasing your mortgage preapproval amount may seem like a complex task, but if you approach it from a place of knowledge and understanding, you can truly leverage the results for success. If you’re planning to get preapproved for a mortgage, take the time to review your finances so you can use the preapproval wisely. Want to learn more about your mortgage options? Have questions about preapprovals and prequalifications? Our team can help!