Getting pre-approved
Before you look at homes, most realtors, lenders and brokers will suggest you get pre-approved for a mortgage. This free service will help you determine how much you can afford to borrow based on your qualification and personal credit rating. Your lender or broker will ask questions about your income and personal financials as well as check your credit score.
They'll come back with an amount you've been approved for, along with a rate that will be guaranteed for a specified time, up to 120 days. If the rates go higher, your rate will not be affected. If the rates drop, you will get the lower rate.
Getting pre-approved will give you the confidence you need when searching for a home. You'll be in a better position to negotiate prices and have a clear picture of what you can afford.
While the pre-approval is no-obligation, the amount you're preapproved for is also not guaranteed. Final approvals will need to be done with the help of a lawyer and your lender upon submission of all the relevant documentation.
Dal Bianco says that sometimes when people go to their lender for preapproval, they estimate their income. Since a lot of people earn bonuses, they often overestimate their actual earnings. When it comes time to provide the lender with confirmation of income, your lender could find out you earn $65,000 or even $50,000 when you believed you made $75,000.
She stresses the importance of providing your banker or broker with as much information as possible. Be sure to ask your lender what papers or identification you need to bring when making your appointment so you can get as accurate a calculation as you can.
Siegle agrees. It's possible to use estimates to figure out what you can pre-qualify for, but there's greater benefit in being able to verify your income and source of down payment, so the amount of the loan is more accurate. "It removes another layer of doubt," he says.
Make sure you aren't looking at houses out of your price range. If you're pre-approved for $200,000, it makes no sense to fall in love with a home that is $250,000, he says.
How much can you borrow?
Generally speaking, the maximum you can borrow is 95% of the value of your home, so you'll need the other 5% in the form of a down payment.
But 95% of a $200,000 home is $190,000. In today's environment, it's wise not to over-extend yourself. "If you go to the maximum you're not leaving yourself much room for a rainy day," says Dal Bianco, adding with rising unemployment rates and an uncertain economic environment, a rainy day could come sooner than you think. "Everybody should have a bit of savings set aside, so I wouldn't advise going to your maximum."
"Most people don't want to give up their lifestyle in order to have a home," she says. "Our parents and grandparents may have been willing to put everything they had to paying off their home. But most people today still want to be able to enjoy life a little - they want to go on vacations and go out for dinners occasionally, and so not extending yourself is helpful."
Siegle says it's important to know how much, theoretically, you can qualify for, but also understand how big that payment is and look at it in terms of the luxuries you'd have to give up. You may need to run your budget numbers backwards to see what type of mortgage payment fits your lifestyle.
Ultimately, the decision comes down to individual choice. Some of the key factors include how confident you are that you're going to have the same job and salary for the next two to five years, and considering what you're giving up by going to the maximum - RRSP contributions, for instance.
The average mortgage for first-time buyers today, Kuo says, is about $200,000 to $300,000.
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