In my 40 years as an Abbotsford realtor, the single biggest mistake I see is first-time buyers looking at homes before they truly know their budget. It's an easy trap to fall into, but it often leads to emotional stress and disappointment.

That's why I call a mortgage pre-approval your "home-buying superpower." It gives you the confidence to search for the right home, not just the one you hope you can afford.

But what exactly is a pre-approval, and how is it different from a simple pre-qualification calculator? Let's break down everything you need to know about getting pre-approved in BC...

What is the Difference Between Mortgage Pre-Qualification and Pre-Approval?

Nowadays, it's relatively easy to get get pre-qualified for a mortgage. Many banks and financial institutions have online calculators that provide you with an indication of whether or not you qualify for the mortgage you think you might need. Even the Government of Canada has one. CMHC has an affordability calculator that will give you some guidlines on whether you should rent or buy. But these calculators all have one thing in common. They are not based on verified information. Wait you say! The info I put into them is correct. That may very well be but it is the financial institution that you are applying for a mortgage from that needs to be involved in the process. A lender checks your credit, verifies your down payment, and analyzes your income vs. debt. The result? You can confidently make an offer knowing exactly what you can spend. 

Why is the Pre-Approval Process a "Superpower" for BC Home Buyers?

When you are pre-approved you can:

1. Shop with confidence: You know your exact budget
2. Protect yourself: You can lock in an interest rate in case future rates are higher. But still get the lower rate if it falls. 
3. A pre-approved buyer's offer is much stronger that one that isn't so you offer will be taken seriously. 

What Documents do I Need to get Pre-Approved for a Mortgage?

Usually, when you get a pre-approval letter from the financial institution, it will give you a list of documents you need to provide that will verify your income, your downpayment and your job. Here is a list of what they typcically look for:

1. Proof of Income (Pay Stubs, T4's)
2. Proof of Down Payment (90 - Day Bank Statements)
3. Information on existing debts like car loans, credit cards or student loans. 
4. Personal Information. 

One that can be a bit trickier these days is if your down payment involves any bitcoin. Be sure to check with your Financial Institution if this is the case. 

What is a Debt Service Ratio? 

There are two kinds of Debt Service Ratios. One is called your Gross Debt Service Ratio (GDS), and the other is the Total Debt Service Ratio (TDS). Your GDS is a comparison of your housing costs to your total income. Housing Costs can vary per Financial Institution but they can include mortgage payments (principle and interest), property Taxes, sometimes heating and also a portion of your strata fee if any. Your TDS is a ratio of all of your debt compared to your income. These ratios are important to consider because even a small increase in your TDS may reflect negetively on your GDS and limit your buying power. This is an important conversation to have with your lender and one to consider before making any major purchase. 

Should I get a Fixed or Variable Interest Rate?

Along with length of term, this is likely one of the most asked questions we get. And the answer really depends on your specific circumstances. Historically, short term financing has often worked out to be less expensive than longer term. Variable can be lower as well but when interest rates are increasing, your variable rate is likely going up as well. So really what it comes down to is what are your thoughts on the direction of the interest rate market and you capacity for risk. Knowing your interest rate is one you can afford for the next 5 years gives many people comfort and peace of mind. Whereas having a lower rate but knowing it is going to be due again in 6 mos, 1 or 2 years can cause anxiety. 

Getting pre-approved is the recommended first step. For the complete Financial Roadmap, including a step by step app, check out my First Time Home Buyer Tool Kit. If you would like a free no obligation telephone conversation, please check out available times on my calendar.