Buying a home is exciting, but before you start comparing kitchens, backyards and neighborhoods, it helps to know where you stand financially. A little preparation before applying for a mortgage can make the process smoother, help you set a realistic budget and reduce surprises once you find a home you want to buy.
Here are some practical steps to take before submitting a mortgage application.
Check Your Credit
Your credit history is one of the factors lenders consider when deciding whether to approve a mortgage and what options may be available to you.
Before applying, review your credit reports for errors or accounts you don’t recognize. In Canada, you can access your credit reports through Equifax and TransUnion.
If your credit needs some attention, paying bills on time, keeping credit card balances manageable and avoiding unnecessary new credit applications can help you build a stronger credit profile over time.
Get a Clear Picture of Your Monthly Spending
A lender may approve you for a certain mortgage amount, but that doesn’t automatically mean it’s the amount you’ll feel comfortable paying every month.
Look at your regular expenses, including car payments, credit cards, childcare, groceries, utilities, insurance and other commitments. Then consider the additional costs that come with owning a home.
The goal is to find a monthly housing cost that leaves room for everyday life, savings and unexpected expenses.
Reduce Debt Where You Can
Existing debt can affect how much mortgage financing you qualify for because lenders consider your debt obligations in relation to your income.
If you’re carrying balances on credit cards, lines of credit or other loans, reducing those balances before applying may improve your overall financial position.
You don’t necessarily need to be debt-free before buying a home. The important thing is understanding how your current debt affects your borrowing capacity.
Build Your Down Payment
The larger your down payment, the less you need to borrow. Canada’s minimum down payment requirements depend on the purchase price of the home, so it’s important to understand the rules that apply to your price range.
Remember that your down payment isn’t the only cash you’ll need. Keep some money available for closing costs and other expenses rather than putting every available dollar toward the down payment.
Prepare for More Than the Purchase Price
First-time buyers are sometimes surprised by how many expenses exist outside the mortgage itself.
Depending on the property and transaction, you may need money for legal fees, inspections, adjustments, moving expenses, property insurance and other closing costs. There can also be immediate expenses after you move in, from basic maintenance to furniture and repairs.
Planning for these costs ahead of time can make your first few months of homeownership much easier.
Keep Your Finances Steady
The period before and during a mortgage application isn’t usually the best time to make major financial changes.
Taking out a new car loan, financing furniture, opening several new credit accounts or making large purchases on credit can change your financial picture. Employment or income changes can also affect an application.
If you’re planning a significant financial move while preparing to buy, speak with your mortgage professional first so you understand how it could affect your application.
Gather Your Documents Early
Mortgage applications involve paperwork, and getting organized before you find a home can save time later.
Depending on your employment and financial situation, a lender or mortgage professional may request documents related to your income, employment, down payment, assets and debts. Self-employed buyers may need additional documentation.
Requirements vary, so ask your lender or mortgage broker exactly what they need rather than assuming every application is the same.
Get Pre-Approved Before You Start Shopping Seriously
A mortgage pre-approval can give you a better idea of the price range you may qualify for and help you approach your home search with realistic expectations.
Keep in mind that a pre-approval isn’t the same as final mortgage approval. The lender will still need to review the property and confirm that your financial circumstances continue to meet its requirements.
That’s an important distinction when you’re preparing an offer.
Think Beyond What You Can Borrow
Mortgage qualification is only one part of deciding what you can afford.
Consider what homeownership will look like month to month. Property taxes, utilities, insurance, maintenance and potential repairs all need to fit comfortably into your budget. Condo buyers should also account for condominium fees and understand what those fees cover.
A home that leaves you some financial breathing room may be a better choice than stretching your budget simply because you qualify for more.
Start the Conversation Early
You don’t need to wait until you’ve found the perfect property to speak with a mortgage professional or REALTOR®.
Understanding your financing early can help you make better decisions about your price range, neighborhoods and property options. It can also give you time to address potential issues before you’re trying to meet the deadlines of an accepted offer.
Preparing for a mortgage isn’t about making your finances perfect. It’s about knowing where you stand, understanding the costs involved and making sure you’re ready for the responsibilities that come with buying a home.
If you’re thinking about buying a home, connect with a RE/MAX Infinity REALTOR® to start planning your home search and learn what to expect along the way.
