Imagine you’ve finally found your dream home – the perfect location, layout, and space for your family. Your heart is set on making an offer. But are you truly ready? Without confirmed financing, a rejected mortgage application could dash your dreams.
Getting pre-approved for a mortgage is one of the smartest things savvy home buyers can do. With fierce competition in Canada’s housing market, a pre-approval letter in hand can be your secret weapon to clinch the home you love.
This definitive guide will walk you through everything you need to know about mortgage pre-approvals – what they are, why they matter, how to get approved, and tips to leverage them for purchasing power. Let’s get started on the path to your new home!
What is Mortgage Pre-Approval?
Mortgage pre-approval refers to conditional approval from a lender indicating how much they are willing to lend you for a mortgage based on a review of your finances. It is not a final mortgage approval but demonstrates that a lender has assessed your financial situation and creditworthiness and has made a tentative commitment to lend you money to buy a home, subject to meeting certain conditions.
Mortgage pre-approval provides homebuyers with the maximum mortgage amount they qualify for, allowing them to search for homes within their price range. It also typically allows borrowers to lock in an interest rate with the lender for 60-130 days, protecting buyers from rising rates while they search for their dream home. [Source]
Pre-Approval vs. Pre-Qualification
Unlike mortgage pre-qualification, which provides a rough estimate of potential lending based on limited self-reported details, pre-approval is a more thorough process involving document verification and credit checks.
Pre-qualification helps buyers ballpark affordability and initiate the home-buying process. Pre-approval suits serious, ready buyers who want to lock in rates and demonstrate credibility when making offers.
Pre-qualification is an informal gauge of readiness, while pre-approval is a stronger, more rigorous process that verifies buyers’ financial standing and signals that they are prepared to purchase a home imminently.
Read more: Mortgage Pre-Approval vs Pre-Qualification in Canada
Benefits of Mortgage Pre-Approval
There are several key benefits to obtaining mortgage pre-approval in Canada:
- Know your affordability: Pre-approval indicates the maximum home price you can afford based on your financial situation. This helps homebuyers narrow their focus and avoid overbidding.
- Lock-in rates: Securing a rate with a lender protects you from rising interest rates during your home search. This can equate to significant savings over the mortgage term. For example, if rates rise 0.5% during your search period, that could cost you over $150 per month or $54,000 over a 25-year mortgage term!
- Stronger purchase position: Sellers often prefer offers from pre-approved buyers who have confirmed their financing ability and are ready to close the deal quickly.
- Streamline the process: Pre-approval gets much of the mortgage paperwork, and underwriting is done upfront, allowing for a smoother purchasing process later on.
Risks of Skipping Mortgage Pre-Approval
While not mandatory, skipping the mortgage pre-approval process does come with some risks:
- Overbidding: Without confirmed financing, eager homebuyers can easily overpay for a home that is out of their budget.
- Tougher purchase conditions: Sellers may impose tighter timelines or stringent conditions on buyers without proven financing. Typical close times run 2-3 weeks longer for non-pre-approved buyers.
- Higher rate volatility: Without a locked-in rate, you remain exposed to rate hikes during your home search. A 2-month search without a locked-in rate could cost thousands if rates rise unexpectedly.
- Delayed or denied financing: Attempting to secure a mortgage after making an offer can lead to delays, stress, and potentially a mortgage denial.
What Will Affect My Mortgage Pre-Approval?
Many factors determine the mortgage amount and rate you will be pre-approved for, including:
Income
A higher safe income from your job or investments allows you to qualify for larger mortgage amounts. Recent raises or a stable career history improve your approval odds.
Employment changes, such as switching jobs, can negatively impact pre-approvals if your income is altered or probation periods are not passed. Having less than six months in a new role increases denial risks. Lenders want stability.
Assets and Debts
Your total assets, like savings and investments, factor in. Large assets offset debts and increase borrowing power. All outstanding debts and liabilities are calculated. Your total debt load affects affordability assessments, and high debts make approval challenging.
Read more: Mortgage Affordability in Canada
Credit History and Score
Most lenders require minimum credit scores of around 600-650 for approval, but 680+ scores get the best rates.
A long, positive credit history with a diverse credit mix helps demonstrate financial responsibility. A short credit history and high inquiries raise concerns. Missed or late payments, high balances, new debts, and credit applications negatively impact your chances of pre-approval and the rates offered.
Down Payment
Your down payment amount, ideally 20%+ of the home value, proves you can cover costs. You must prove that the down payment is from accepted sources like savings, investments, and gift letters. Unverified funds are problematic.
More down payment lowers lender risk for high-ratio mortgages. Small down payments may require mortgage loan insurance.
Employment History
A steady two-year employment history is preferred. Frequent job changes raise instability concerns. Being in a probation period can negatively impact pre-approval amounts and rates unless you have additional assets.
Self-employed borrowers often need two years of tax returns and business documentation to confirm sustainable income.
Existing Obligations
Your debt service and total debt service ratios (GDS & TDS) calculate your total debt and spending. Too high ratios limit your mortgage eligibility.
Monthly car loans, credit card payments, child support, and other debts reduce the amount lenders will approve you for. Pay down debts before applying.
Knowing what lenders assess allows you to optimize these areas before applying and demonstrate your creditworthiness.
Getting Pre-Approved for a Mortgage
Now that you understand the importance of pre-approval, let’s go through the process step-by-step.
Where to Get Mortgage Pre-Approval
In Canada, you can get pre-approved directly through banks, credit unions, and mortgage lenders. Alternatively, you can work with a mortgage broker who will source mortgage options on your behalf from multiple lenders. Brokers allow you to compare multiple rates and products through one channel.
Major banks like RBC, TD, Scotiabank, CIBC, and BMO have pre-approval processes. Here is an overview of pre-approvals at the Big 5 Canadian banks:
| Bank | Process | Validity Period |
|---|---|---|
| RBC | Online application | 60-120 days |
| Scotiabank | eHome online platform | 60-130 days |
| TD | Online, phone or in-branch | 120 days |
| CIBC | In-branch appointment | 120 days |
| BMO | Online, phone or in-branch | 130 days |
You can also explore smaller lenders, credit unions, mortgage finance companies, and private lenders. Here is a comparison of common mortgage pre-approval providers in Canada:
| Provider | Benefits | Drawbacks |
|---|---|---|
| Major Banks | Wide branch access, familiar branding | Limited mortgage range, higher rates |
| Credit Unions | Competitive rates, member-ownership | Smaller branch networks, limited accessibility |
| Mortgage Broker | Access to multiple lenders and rates | No direct bank relationship, commissions charged |
| Mortgage Finance Companies | Very low rates, fast approvals | Strict qualification criteria, limited terms |
| Online Lenders | Fast, fully digital process | Less personalized service, weaker support |
Documentation Needed for Mortgage Pre-Approval
Lenders will request proof of your income, debts, assets, credit standing, and down payment funds to assess your financial situation.
Documents you should expect to provide include:
- Government-issued ID
- Income Report
- Credit Report
- Recent pay stubs
- Notice of Assessments
- Tax documents
- Bank statements and investment records
- Debts and liabilities information
- Down payment source records
- Proof of any gifts or assets to be used
Having these documents ready to submit will help streamline the pre-approval process and avoid delays. Use a Pre-Approval Document Checklist to ensure you have everything in order.
Mortgage Pre-Approval Process
The typical steps in obtaining mortgage pre-approval are:
- Check your credit score – Obtain copies of your credit report from Equifax and TransUnion. Check your credit score and resolve any errors on your report. Aim for a credit score above 680 for the best mortgage rates. Pay down balances, and don’t take on new debts before applying.
- Research lenders – Compare major banks, credit unions, mortgage brokers, mortgage finance companies, and online lenders. Learn about their mortgage rates, terms, fees, pre-approval processes, and customer service. Mortgage brokers allow you to access rates from multiple institutions.
- Documentation – Supply required documents to the lender to verify your financial standing.
- Underwriting – The lender analyzes your finances and runs credit checks to assess your creditworthiness.
- Conditional approval – If approved, the lender provides a pre-approval letter detailing the loan amount, rate, and terms.
- Final approval – As you move to purchase a home, the lender will validate that you still qualify and remove conditions once the property is appraised. Buyers should remember that pre-approval does not guarantee final mortgage approval and funding. Conditions still must be met for the lender to grant firm approval.
Questions to Ask When Getting Pre-Approved
To set the right expectations and make the most of mortgage pre-approval, make sure to ask your lender or broker:
- How long is the rate lock-in period? When does it expire?
- Is there a rate guarantee or float down if rates drop during your term?
- Can I extend my pre-approval if I need more time? What does an extension cost?
- What are all the conditions I must meet for final approval?
- What is your process if my mortgage ends up being denied?
Tips for Getting Pre-Approved in Canada
- Interview multiple lenders to compare rates, terms, and pre-approval experience. This also results in only a single credit hit rather than multiple checks.
- Be conservative on budget and don’t max out the total pre-approved amount – leave room for other housing costs.
- An appraisal value lower than the purchase price can alter the final approved loan amount.
- Avoid any major financial moves after getting pre-approved, as changes may invalidate the pre-approval.
Reasons Why Your Mortgage Could Still Be Denied
Some of the common reasons pre-approved borrowers can still have their mortgage denied include:
- Credit deterioration – Damage to your credit score or new debts acquired after getting pre-approved may invalidate the initial approval. A new 30% credit utilization compared to the time of pre-approval could prompt a denial.
- Job loss or income change – Losing your job or source of income that previously qualified you can result in a rejection. Working less than six months at your current job can also increase your risk of mortgage denial.
- Lower appraisal value – If the home appraises for less than the purchase price, your loan amount may decrease or be denied. Appraised values below 90% of the purchase prices will usually require renegotiation.
- Failure to meet conditions – Not adequately providing all required documents or meeting stipulated conditions can result in an expired pre-approval. Missing title insurance or home inspection documents are common issues.
- Better offers – In hot markets, sellers may accept another buyer’s offer over yours even if you are pre-approved. Unconditional or cash offers can trump financed offers.
If one lender denies your mortgage, don’t give up hope! You may still have options, such as:
- Finding a co-signer to leverage someone else’s stronger credit and strengthen your application.
- Improving your credit score and reapplying after credit repair
- Saving a larger down payment to offset risks
- Exploring alternate/private lenders, credit unions, or online providers
- Adjusting your home purchase price to a more affordable range
Next Steps After Getting Pre-Approved
Once you have a pre-approval letter in hand, here are some recommended next steps:
- Interview real estate agents – Find an experienced agent who can leverage your pre-approval to maximum advantage in offers and negotiations.
- Start touring homes – Now that you know your budget, leverage your realtor to view qualified listings and neighbourhoods. Attend open houses of interest.
- Make offers – Be ready to move quickly when you find the best one! Submit offers emphasizing that your financing is secured via pre-approval.
- Finalize approval – As you close to closing, confirm that all conditions are met for the lender to remove subjects and formally approve your mortgage.
What Not to Do After Pre-Approval
- Don’t make large purchases – This could alter your debt-to-income ratio and jeopardize approval.
- Don’t take on new debts – New debts negatively impact your credit score and ability to borrow.
- Don’t change jobs – Employment changes may invalidate a pre-approval if income is altered.
- Don’t hurt your credit – Damaging your credit score can result in a lender denying your mortgage application.
Using Mortgage Pre-Approval to Your Purchasing Advantage
Don’t let your Canadian dream home slip away because you didn’t secure financing ahead of time. Now that you understand the mortgage pre-approval process inside and out, you can approach homebuying with confidence, credibility, and a competitive edge. Sellers will take comfort in knowing you are prepared for a quick closing with minimal obstacles or delays.
Getting pre-approved takes some time and paperwork upfront but will pay dividends through a smoother purchase, better mortgage rates, and the power to win in bidding wars.
For personalized guidance on pre-approval options or expert advice on purchasing in the 2024 housing market, our experts at Best Mortgage Online are here to help. Let’s connect today so you can make your Canadian dream home a reality!
FAQs
What documents are needed for mortgage pre-approval in Canada?
Documents like government ID, proof of income, tax records, bank statements showing assets, and liability details are typically required to obtain mortgage pre-approval. Lenders need to verify your financial situation.
How long does mortgage pre-approval take in Canada?
Pre-approval usually takes 1-2 weeks in Canada. The time varies depending on lender requirements and how quickly you submit documents. Simple applications with clear documentation can be approved in a few days.
When should I get pre-approved for a mortgage in Canada?
Pre-approval before starting your home search is recommended so you know your budget and lock-in rates. However, you can get pre-approved anytime during the process before making an offer.
Where can I get pre-approved for a mortgage in Canada?
In Canada, mortgage pre-approvals are offered by major banks, credit unions, mortgage brokers, finance companies, and some online lenders. It is advised to shop rates from multiple sources.
Can I get pre-approved without a down payment in Canada?
Yes, pre-approval is possible for high-ratio mortgages with less than 20% down in Canada. However, smaller down payments mean higher insurance premiums you'll pay.
Does mortgage pre-approval affect my credit score in Canada?
Multiple applications within 45 days only count as one credit check. So, getting pre-approved by several lenders minimizes the credit impact compared to applying separately over months.
What happens if I'm denied mortgage pre-approval in Canada?
Work on improving your credit, saving a larger down payment, adding a co-signer, or looking into alternative lenders if denied by one institution. There are often still options to ultimately get approved.
Can my mortgage pre-approval be revoked in Canada?
Yes, pre-approvals can be revoked before closing if your financial profile changes, such as job loss or new major debts. Avoid significant changes before getting your final mortgage approval.
What closes faster, pre-approval or pre-qualification in Canada?
Pre-approval closes faster, typically 12 days faster on average in Canada. Pre-approval proves you are ready to transact immediately vs. still needing to verify details and approval like with pre-qualification.
How do I get the highest pre-approval amount in Canada?
Maximizing income through promotion or a new job, minimizing other debts, and boosting your credit score through responsible practices help increase the pre-approval amount you qualify for.