Hello my name is Kevin Carlson I'm a mortgage broker here in Canada, thank you so much for
joining me on my YouTube channel to learn a little bit more about mortgage financing.
Today we're talking about the difference between pre-approved and pre-qualified. Now you may have
seen signs and advertisements from different banks saying "get pre-approved in five minutes"
or "get pre-qualified in two minutes". Well it takes significantly more than that to actually
get you pre-approved. Pre-qualified is just kind of a very basic term for just looking your debt
service ratio numbers, so we're going to talk about the difference between those two today
where if you have pre-qualified you're certainly not ready to go out and shop for houses quite yet.
So getting pre-qualified just allows you to plug in your own numbers when it comes to your income
and your debts and then it figures out about how much you're pre-qualified for for a mortgage
based on the mortgage stress test. This is done using debt service ratio calculations.
It takes your gross household income as a ratio up against the mortgage and taxes and any condo fees
for the home that you're purchasing. It also factors in any additional debts on
credit cards, lines of credit and loans. So the pre-qualification process
is just very quick math. It's similar to taking your car to your mechanic and saying that "it's
not running right and there's a problem". So you pull it up to the bay door and the mechanic lifts
the hood and just kind of looks around with a flashlight and says "okay now we're pre-qualified
to bring your car into the shop." Not really any work gets done, it's just sort of a quick look.
So the maximum debt service ratio that you're allowed to have
of your gross household income up against the mortgage and taxes would be 39%. So for easy
numbers let's say we have a family that earns $10,000.00 per month gross verifiable income.
Using the GDS or your gross service ratio up against the mortgage, the taxes and any
condo fees, that family cannot spend more than $3,900.00 per month on those items. Now the total
debt service ratio is a little can be a little bit higher than that, so that includes the mortgage,
the taxes and any condo fees plus any additional debts. The maximum total debt service ratio can
be up to 44% with excellent credit. If your credit is not quite as good, then we have to stick under
40%. So that's about it for getting pre-qualified. There are no credit checks, there is no looking at
any pay stubs or any bank statements to verify down payment, it's a pretty basic process. So
let's talk about the actual pre-approval process rather than being pre-qualified. My first step to
get my clients pre-approved would be to take a full and complete mortgage application.
I typically do this either in person or over the phone. I find that when clients submit a mortgage
application through my website or just sending in documentation just a printed off application,
quite a bit can get missed. It is very very important to make sure that I speak to the clients
to be sure that I have all the details when it comes to their credit, their income and their
down payment. I did a previous video when it comes to taking a full mortgage application.
I'll link to that video in the description below where I go over a complete mortgage
application from start to finish. It gives a pretty good overview of what you can expect when
you speak to myself or your mortgage broker when it comes to applying for a mortgage.
Even though I went through the application process pretty in depth in that other video, here is just
a little bit of a quick overview. The first step is to get your full name, your address, your
telephone number, social insurance number and your date of birth. I also need an employment history,
for the last three years. I need the name of your employer, your position, whether you're full-time,
part-time, permanent or casual. I'll also need to know if you have any other secondary income,
like child tax benefit, spousal or child support, or if you have a second job a
part-time job or a secondary business that earns you money on an annual basis.
I'll also need a full list of assets, any vehicles that you might own, snowmobiles, boats, quads RVs.
I need to know RRSPs and pensions, mutual funds and any other investments that you might have.
During the pre-approval process, I very often will have the client sign a consent form
so they can access their credit reports to make sure that the credit is satisfactory.
Sometimes I'll ask for some pay stubs, T4's, and if you're self-employed there's going to
be quite a bit of documentation I will request upfront. Anybody who's self-employed, I need your
T1 generals as well as your any incorporation documents and notice of assessments all for the
last two years. Anytime I'm working with somebody who's self-employed, I want to make sure I have at
least two years of these documents sitting in the file ready to be submitted to the lender.
Sometimes people who are self-employed don't always keep some of this documentation on hand.
So it's good to ask for it up front so that when they found a house that they're going to purchase
that they're not scrambling to get their hold of those documents. Sometimes I'll even ask for
copies the last three months of bank statements or investment statements just to verify that the down
payment funds are there. So let's go over some of the things that can foul up a mortgage application
that I always try to avoid make sure that once I've sent clients out with their realtor to
purchase a home, that they're actually going to be getting a mortgage when they do find that house.
So as I mentioned I do pull credit reports most of the time and there's some things that come
up in the credit reports that people might not be aware of that can foul up a mortgage pre-approval.
So, if you have any collections or any bad debts that are unaddressed, those certainly
need to be looked at and that can certainly keep you from getting a mortgage down the road.
If you only have one credit item like let's say you have a credit card, but you have that credit
card with a joint applicant like a spouse or even a parent, sometimes that credit card might
not show up on your credit report so if you're counting on just having that one credit card
being your credit history and helping establish your credit score and then it's not there,
that can be pretty devastating. Having no credit is almost as bad as having bad credit.
If you've just recently started a new job and you've only been there for a few months, sometimes
you could be on a probation period. Most the time three months is what you can expect for probation,
but there are some employers that have a full one year probation period. Sometimes we can get an
exception to have the lender waive that probation where they're still gonna give you a mortgage,
but quite often if you're new to that industry and new in that field,
then we might have to wait until that probation period is fully passed.
So if you've been working with an employer full-time hours over the last year or so and
your understanding is that you are permanent and full-time, but then that employer for some reason
actually has you classified as casual, well that can certainly throw a wrench into your
pre-approval process pretty quickly, so these are good things to find out during the pre-approval.
Looking at some bank statements or investment statements can be important because
sometimes investments are locked in. So if somebody has a sum of money that's all or
some of their down payment and they didn't realize that that investment was maybe a term deposit or
something that you can only access those funds at a certain later date, well that's certainly
going to put you in a bit of a pinch to try and get access to those down payment funds.
Another thing we have to look for is deposits to your bank account where your down payment is for
the last three months. We have to make sure that all the deposits to that account are verifiable.
So if you have any deposits to your account that can't be quantified by payroll, or say the sale
of a vehicle or even another house, well then we have to ask a few questions. If you've transferred
money from a line of credit or a credit card or a borrowed it from a friend who's not a family
member, well we need to address that at the pre-approval stage for sure. Quite often when
I'm working with people who are self-employed or even commissioned, and I ask them what their
income might be, well sometimes they end up giving me what their company's sales are for the year
rather than the number that we actually use is their personal taxable income. So quite often
that's why I do ask for the T1 generals and your notices of assessments for the last two years
so that I have those in the file and can actually verify that the taxable income is what you said
it was. Another good reason for people who are self-employed for me to have their notice of
assessments is to ensure that their income taxes are paid and up-to-date. If you owe Revenue Canada
any money for the previous tax year, the mortgage lender will require that you get that paid up.
The biggest reason for that is that in the event of a foreclosure, rather than the bank being first
in line to get the money then it's actually revenue Canada, so if banks are always on the
lookout to make sure that if there's any income tax owing for a client that that's been addressed
and that you know if there's a foreclosure the bank gets paid first rather than the government.
If you're counting on a second job to be used as a pre-qualification income then we do need to
look at pay subs for that job as well as T4s. The reason for that is that if you have a secondary
job and you're counting on that income, we can only use it if you've had that job for at least
two years. So I'll often request pay stubs and T4s from that second job for the last two years
and be able to use that as a secondary income on a two-year average. So that's about it for the
difference between pre-qualified and pre-approved, so if you're not sure if you've been pre-qualified
or pre-approved if it took less than five minutes you've been pre-qualified, so a pre-approval
process takes at the very least 15-20 minutes just to take a mortgage application in a proper manner.
Going through that process too quickly and missing any details in your application can throw a huge
wrench into being able to get a mortgage once you've found a home. If you have any questions
about getting pre-approved or pre-qualified please put it in the comments below or if you'd like to
get pre-approved to purchase a home of your own certainly contact me through my website,
I'd be happy to work with you. Thank you so much for your time and have yourself a great day.