Mortgage pre-approval is required in order to be able to buy pre-construction condos in Toronto. This article will discuss how you can ensure that your mortgage is pre-approved before you purchase a new condominium.
Before Getting Your Condo, Get Your Mortgage
Whether you are buying pre-construction or resale, without a mortgage it will be very hard to secure a condo. In most cases when buying pre-construction property is it required for you, as the potential home buyer, to provide the building company with a pre-construction mortgage approval. This allows the builders to determine whether you would be qualified to buy the property at that moment in time even if the pre-construction project is not due to be completed for a number of years. The mortgage pre-approval states that a home buyer is currently in a financial position to enter into an agreement with a lender proving to builders that they will get paid.
Acquiring mortgage pre-approval is a vital step when purchasing a pre-construction condo unit in a new development. Many people are unaware of this step and can often believe that it will prove to be a complicated process. However, this isn’t the case. Below, we walk you through the process of gaining mortgage pre-approval.
Pre-Approved Mortgage: The Process
Many may think that the process for acquiring a mortgage pre-approval for a pre-construction condo is different from that of a resale property. Yet, this is not quite true.
The process of getting a mortgage pre-approved requires the prospective homeowner to approach a mortgage lender. Approved lenders for pre-construction projects generally need to be Schedule 1 Canadian banks. Generally, a mortgage lender will ask to look at current assets, income level and current level of debt before they make a decision as to the amount in which they would be willing to lend. It is also important to provide your chosen mortgage lender with the following items:
- Proof of employment and salary
- Proof of your ability to pay certain costs such as down payment and closing costs
- Information about owned assets such as a car
- Information about any debts or financial obligations that you have
Once they have assessed these items a prospective home buyer will know the maximum amount of a mortgage they can qualify for, estimate their mortgage re-payments and possibly lock in an interest rate. The important thing to remember is that pre-construction mortgage approvals have a maximum life-span of approximately 120 days and is not a binding approval through to closing. When buying a pre-construction property, you will be required to be re-approved no later than 4 months prior to the closing date of the property.
It is important to keep in mind that oftentimes developers will have a bank in place that will offer locked in rates and other existing benefits that are relevant to the purchasing of a pre-construction project. If you are unsure if this is the case, make sure to ask your developers prior to starting the mortgage pre-approval process.
Developers will also inform you of the requirements that a mortgage pre-approval must provide. These can include the project name, unit number and the unit price. Be aware that developers are very strict about these requirements and if the pre-approval document you received from the bank does not state these items, you will be asked to resubmit your application.
The Finance Behind Pre-Construction Condos
It’s no secret that oftentimes the hardest part of purchasing a pre-construction condo is the financing that goes into it. However, with a bit of preparation you can ensure that when each step of the process occurs, you’ll be ready for it.
When budgeting for the purchase of a pre-construction property or condo unit, it’s important to keep more than your upcoming mortgage re-payments in mind. Most down payments on pre-construction developments are usually higher than that of a resale property. Some developers can ask for up to 25% of the property price. However, you should factor in between 15% – 20% as a good rule. If you are interested in a particular project, ask the builders how much they expect. This will indicate whether it will be something that you can afford or whether you’ll have to look at a different project.
There will also be closing costs involved with a pre-construction property such as legal fees, land transfer tax and development charges. Oftentimes, when going to get a second approval for a mortgage, your lender will require financial proof that you can afford the 1.5% – 4% closing cost on the property.
Additionally, there will also be the interim occupancy fees or phantom rent. If you decide to move in on the occupancy date, the payments that you will be making will not be going towards your mortgage re-payment. This is due to the fact that until the closing date passes, you are not the legal owner of the property. Many individuals can often get confused by this part of the purchasing costs. Once you are a registered owner, that is when your mortgage payments will begin.
Researching how much these purchasing costs may be can be really helpful prior to getting a mortgage pre-approval. It will give you insights into how much you can expect to pay during the purchasing process of a pre-construction condo allowing you to budget more effectively.
Closing The Deal On Your Pre-Construction Condo
Buying a condo unit in a new development that is currently in construction can be an extremely exciting time for prospective homeowners. By putting in the research and budgeting efficiently, you can ensure that when the time comes you will be pre-approved and capable of closing the deal on your new home.