Published: October 17, 2020 • Last updated: January 5, 2021 at 7:39 am
Looking For A Mortgage Pre-Approval In The GTA?
Before you start your house-hunting process, there’s a few pertinent steps you can take to save time and money, and make your overall home buying process smoother. Getting a mortgage pre approval ultimately determines the house price you can afford, which lets you budget for your home purchase and begin searching for your new dream home.
Your real estate agent in fact should insist you know this prior to going out home shopping.
Why Homebuyers Should Get Pre-Approved, And How Lenders Decide What You Can Afford
The most important thing you need to know BEFORE you start home-shopping is what you can afford. Importantly, what you can afford isn’t just the purchase price of your new home, but what you are comfortable spending each month. When you add up the mortgage payment, the property taxes, utilities, condo fees and home maintenance at what point do you scream “that’s enough!”
In addition to the purchase price and what your total monthly costs will be, there are also one-time closing costs that need to be budgeted for. And, when you add this all up, unless you are independently wealthy, most people will require a mortgage which means you need to have a pretty accurate idea how much money a lender is willing to give you before you make an offer.
Unless you’ve considered and planned for all these things, you won’t know what price range you can target, and it’s easy for your eyes to be bigger than your wallet.
Mortgage Pre-Approval Is An Affordability Calculation
Mortgage lenders will assess affordability for you too – they follow precise measuring guidelines to determine how much of a mortgage you are qualified to carry. Their method is pure arithmetic – they remove the emotion from the calculation. They calculate two very important ratios.
- Your GDSR (Gross Debt Service Ratio). This is the sum of your mortgage, taxes. heating bill and half of your condo fees, if applicable, as a percentage of your gross income.
- Your TDSR (Total Debt Service Ratio). Includes ALL your other monthly debt obligations (credit cards, student loans, car payments etc.) combined with your housing costs as a percentage of your gross income.
Gross Debt Service Ratio (GDSR)
This refers to principal, interest, property taxes, and heating costs – in short, the costs of owning your home. If applicable, fifty percent of condo fees are added to this equation. To figure out our GDSR, we will take the household’s gross income (how much money you make from all income sources before any taxes are taken off) and divide these home ownership costs by that number.
Most lenders want your GDSR to be at or under 39%. For example, if you are looking to get a $1,000-per month mortgage payment, and your heating bill is $1,800 per year, while you pay $3,000 in taxes, then your cost (for mortgage purposes) for the year is $16,800.
You would have to earn at least $52,500 per year in order for lenders to consider you for this hypothetical home under most circumstances.
Total Debt Service Ratio (TDSR)
The second rule of thumb is your entire monthly debt load should not be more than 44% of your gross monthly income.
Basically, the lender will take the number you used when you figured out your annual housing costs (PITH) and add any other debt that you have. This includes any car loans, credit card debt, alimony, child support, and any other loans.
Just Because You Can, Doesn’t Mean You Should
If you spend 39% of your gross income on housing costs, you will have to sacrifice in other areas in your life. It’s just basic math.
You likely won’t have much breathing room to throw at worthwhile goals like retirement savings, RESP contributions, vacations, or small luxuries. (This isn’t even accounting for higher interest rates or unexpected job loss.)
Give yourself some breathing room and don’t tempt yourself by shopping for homes well outside of your true affordability range.
So, How Can You Be Sure What Your Affordability Range Is?
You can do some rough numbers yourself, but the only way to be sure what your limits are is to get a mortgage pre-approval. And, you should get pre-approved long before you actually think you might want to buy a house.
Start talking to your mortgage broker early in the process. They will help you to identify all the things you need and get you an answer about the maximum mortgage you are qualified for. Getting pre-approved means you’re CONDITIONALLY approved for a mortgage – up to a certain limit – in advance of actually buying a house.
We emphasize CONDITIONALLY, because it’s important to remember that pre-approval is not a guarantee — it’s simply saying what you are able to afford and the maximum that a lender will give you if everything checks out.
In fact many lenders do not even review pre-approval applications. They simply hold a rate for you! So please do NOT fall in love with yourself just because you have been pre-approved.
Another important thing missing from the equation is the actual house or condo that you want to buy. For a final mortgage approval, lenders also need to assess the property, including such things as its true appraised value, whether there are problems with the land or building infrastructure and many other factors.
Your Credit History and Credit Score Also Matters
Although these pre-approval calculations are theoretically what you can afford, lenders also care about your track record of paying your bills and debts on time consistently, each and every month. If your credit score is too low, lenders will be less willing to take a risk on you, the interest rate you’re offered could be higher, and the maximum amount you can borrow will be lower. We strongly recommend practicing good credit hygiene to ensure your credit score is as high as it can be before you start looking for a house.
As part of the pre-approval process, most lenders will want to do a hard inquiry of your credit score. An experienced mortgage professional can review your personal copy of your credit report, together with all the documents a lender is going to ask for and will be able to offer a very strong opinion on what you will qualify for.
Why Is Your Mortgage Pre-Approval Rate Not The Lowest?
The time to negotiate hard for your mortgage interest rate is when you have an accepted offer to purchase, and you have applied for a mortgage. At that time, every one takes you seriously. This is no longer a what-if discussion but it’s the “real deal”.
But at the pre-qualification or pre-approval phase, no lender will discount their rate for you. And in fact, many lenders have pre approval rates which are higher than their normal rates!
Pre-approval is free, and speeds up the process substantially once you find the home you’ve always wanted. Basically, the idea is we get all of your paperwork in order for your lender and assesses your risk level in advance. That way, nothing is rushed, and you can feel more confident when you start making offers.
Applying for a mortgage pre-approval doesn’t commit you to one single lender. In fact, some industry insiders say that only one of every five pre-approvals issued will fund with that same lender.
However, once you’re pre-approved it does guarantee that the mortgage rate offered won’t change during the 90 or 120 day mortgage pre-approval period with us. By locking in your rate, you are protected if interest rates rise while you’re out house hunting. In the case that interest rates go lower during this time, we will honor the lower rate.
If you’re ready to begin your mortgage pre approval process, click here to complete our secure online form. Or, if you have special circumstances which may make pre-approval difficult, contact us to discuss how we can help you find financing that meets your specific needs!
You have nothing to lose, and everything to gain when you’re ready to make an offer.
Want to learn more about mortgage pre-approval? Download the ASKROSS Pre-Approval Primer.
- Is Mortgage Pre-Approval Worth It?
- Mortgage Pre-Approval In Canada: What It Is & How To Get It
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- First Time Homebuyers Ontario: Everything You Need To Buy Your First Home
- Ready To Buy A Home? How To Assemble A Great Support Team
- Good Credit Hygiene Saves Over $100K On Typical Mortgage
One of Toronto/GTA's Most Trusted and Knowledgable Mortgage Agents
Ross Taylor is recognized by his peers as one of Canada's pre-eminent difficult mortgage specialists. His ASKROSS blog and column in Canadian Mortgage Trends are focused on the intersection between mortgage financing and personal credit.
With unique dual certification as a licensed credit counselor and mortgage agent, Ross's insights are valued by mortgage professionals and homebuyers alike.
If you have questions about anything financial or mortgage-related, please contact [email protected]. Ross answers everyone personally.
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