You have a sizable down payment saved, a solid job, and decent credit. So you should have no problem getting a mortgage, right? Not necessarily. There are a lot of factors that lenders consider before they will lend to you, even if you have a great job and enough savings. The ins and outs of mortgage qualification are highly complex, so it's important to learn as much as you can before applying. Here are some of the most important things to know when getting a mortgage.

Pre-Approval Vs Approval

A pre-approval is not a guarantee for funding, nor does it mean you're getting the best rates and terms available. It's a letter outlining the total amount that a particular lender will lend to you based on your current financial health. And since pre-approvals do not go under the same level of due diligence as a real approval, it's only an estimate as to what you can afford based on the initial documentation you have provided. When you finally find a home and put in an offer, you will still need to apply for a mortgage again. If anything has changed that could impact your creditworthiness, you could very well be declined for a mortgage, even if you have a pre-approval in hand. 

Prime vs Subprime vs Private Lenders

On the prime side of the business, you can qualify for the lowest rates and best terms, but you will need to have good credit, a solid income, and fit within their debt-to-income ratios. If your current employment and creditworthiness do not meet their requirements, you will need to seek financing from a subprime lender who has more relaxed qualification rules but higher rates and fees. If you can't qualify on the subprime side either, you'll need to use a private lender who will only take the property into consideration and your ability to repay the debt, but this will come with the highest fees and interest rates.

Uninsured vs Insured vs. Insurable

The rate you will get highly depends on how the mortgage is insured. In the case of an "insured" mortgage, the borrower pays for the mortgage default insurance and, for this reason, is offered the lowest interest rates. To be insured, the purchase price must also be under $1M dollars and have an amortization period of 25 years or less. Mortgage default insurance is also mandatory if the loan-to-value is higher than 80%. 

If you meet the same requirements – purchase price and amortization – but have a 20% or more down payment, the lender will pay for the default insurance. This is considered an "insurable" loan and will generally come with lower interest rates than an uninsured mortgage. 

Lastly, an uninsured mortgage is one that does not qualify for insurance and will have the highest interest rates. Any purchase over $1M, amortization lengths longer than 25 years, as well as rental properties and refinances, are automatically classified as uninsured.  

The Recent Changes To The Stress Test

One of the most important things to know when getting a mortgage is how the stress test will impact your purchasing power. On June 1st, a new minimum qualifying rate was put in place for both insured and uninsured mortgages at 5.25% or two percentage points above the contract rate, whichever is higher. This is a 46 basis point difference from the last stress test in place, so your affordability will be reduced no matter what your income is. 

Every Lender Is Different

The products that Scotiabank offers are different from that of TD, RBC, First National and the rest of the lenders. The rates and prepayment privileges, and penalties will also vary by lender. To ensure you're getting the best mortgage product and rate for your needs, it's wise to speak to a mortgage agent who knows the ins and outs of each lender's products and can match you with the right option.

If you'd like to know how much home you can afford based on your creditworthiness, contact us today at the Jennifer Gale Real Estate Team.