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If you’re house-hunting and have a preapproval letter in-hand, you’re already a cut above others who might be looking at the same property. And getting preapproved for a mortgage isn’t as daunting as it might seem. The key is to know exactly what to expect and what documents you’ll need. From rateTangerine Mortgages
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To get the ball rolling with your homebuying process, start with these four steps:
A mortgage preapproval is a letter from a lender stating a specific monetary amount that they are willing to lend you for the purchase of your home. This is based on a number of factors, including your income, debt and credit score.
A mortgage preapproval is not a promise that you’ll get a loan. It’s a statement that your lender has evaluated your finances and is willing to finance your purchase.
The terms “prequalification” and “preapproval” are often used interchangeably. It really depends on how your lender defines the first step in its mortgage process. Both prequalification and preapproval provide useful information about how much you may be able to borrow.
Prequalification generally refers to an informal evaluation of your finances. You provide the lender with information about your income, assets, credit and debts. The lender doesn’t verify this information, but uses it to estimate whether you can qualify for a mortgage and approximately how much you can borrow. If you’re confident about your finances, you might skip prequalification and go straight for a preapproval.
Preapproval is much more involved and requires documentation. Unlike prequalification, lenders verify your income, assets and liabilities during preapproval. Lenders will also pull your credit, which may temporarily drop your credit score. But preapproval typically holds more weight to sellers and realtors.
Getting preapproved is beneficial for several reasons. Most importantly, you’ll have an accurate idea of how much you can actually afford to spend on a new property. Having a preapproval letter can also give you an advantage over other buyers.
Bringing a preapproval letter to a buyer or real estate agent shows that you’re prepared and serious about making a purchase. It proves that you can get a loan for at least the asking price of the house or property.
Here’s what lenders look for during the preapproval process:
Most lenders will require these documents when you apply for a mortgage:
Self-employed borrowers are treated a bit differently than other borrowers. You’ll need to have at least 2 years of tax returns that show your business income. If you’ve only been self-employed for one year, most lenders won’t preapprove you unless you have significant alternative sources of income, a cosigner or a spouse who could put the home in his or her name.
You’ll also need to show proper documentation, such as T1 tax returns and T4A forms.
Keep in mind that any business expenses that you write off for tax purposes are deducted from your total income, which can put you at a disadvantage when applying for a mortgage. While you should take advantage of eligible tax write-offs for your business, you may want to pick and choose what you write off if you know you’ll be applying for a mortgage. Speak with a tax professional before making any decisions.
How to get a mortgage is you’re self-employed
Once you’re preapproved, keep a close eye on your finances until the entire mortgage process is complete. Any changes to your financial situation from the time you’re preapproved to the date of your closing can impact your ability to finalize the loan.
Getting preapproved for a mortgage is a helpful first step in the home buying process and can help you edge out the competition. But it’s important to do your due diligence ahead of time to help make the process as smooth as possible and ensure that you get the best rate and terms available.
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