Frank Salvatore
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The mortgage pre-approval

September 27, 2011 by · Leave a Comment 

Are you looking to own real estate in Hamilton?  Getting a pre-approval from a lender makes it easier for you to find the home you want within your price range. However, getting pre-approved does not guarantee you’ll get the mortgage. It is simply a certificate saying that through a quick calculation of your finances, the lender has determined the amount of mortgage you can afford. The lender will also fix the interest rate, which is usually good for between 60 and 90 days – a few lenders will guarantee that rate for up to 120 days.  And if a better rate promotion occurs during your fixed period, you will eligible for that as well.

It is likely the pre-approval will lead to a mortgage but there have been situations when this has not been the case. The best way for you to ensure success is to understand what the lenders look for and be prepared. Another way is to work with your mortgage broker who can flag any potential challenges and steer you toward the right lender to fit your particular situation.

First of all, a lender will determine your debt load through two simple calculations: Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS). Your GDS is your proposed housing costs, including mortgage payments, taxes, heating costs and 50 per cent of condo fees, if applicable and shouldn’t be more than 32 per cent of your gross monthly income. This can vary among lenders. Your TDS calculations take into account all your other debt obligations, such as loans, car payments and shouldn’t be higher than 40 per cent.

Once you’ve made a conditional offer on the home you wish to purchase, within the price range established in the pre-approval, the lender will now gather all the documentation required to approve the mortgage, including your credit report.  Even with a pre-approval, the offer should be conditional – you still have to get final approval. Other items a lender will need is confirmation of your salary in the form of a letter from your employer and some lenders may want to see a current payroll stub as well; other sources of income; information about your bank accounts, loans and other debts; proof of financial assets; sources of the amount of down payment and deposit and proof that you have the funds for closing costs, which should average between 1.5 per cent and 4 per cent of the purchase price.

It’s this part of the process where your lender gets your true financial picture. And it’s here that problems crop up. It may be that your credit score is not high enough for one particular lender.  Sometimes there are surprises with loans and car payments, especially when one spouse has hidden information from the other spouse, which does happen. You may not have the right source for the deposit funds and may not have the closing costs deposited into an account. And your GDS and TDS may be too high to fit that particular lender’s criteria.

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Frank Salvatore