Getting A Mortgage Pre-Approval

by: Teresa Keill, Mortgage Agent Keill & Associates- Client Care Team

One thing is certain- Canadians love to own their own home. Of course they do. It provides shelter, a place to call home, a location to raise a family and build memories, while over time increasing their own net worth and financial security. All-in-all, it is a win-win-win situation with not much downside- except the cost.

Most people simply do not have $400,000 in their pockets to dole out to purchase a home . The vast majority of home owners have used financing through a mortgage to acquire their homes. This process of taking on debt is scary and shrouded in complexity. How much can we afford to borrow? How much will the bank lend us? What are my payments going to be? These are all the questions that come up in the earliest part of deciding to buy a home.

To help answer this question for Canadians looking to finance a home, families and individuals often look to the mortgage Pre- Approval process. This Brief Discussion Paper aims to provide some clarity about this important process.

What is a Pre-Approval Application Process?

The Canadian mortgage pre-approval process is an important step for homebuyers, giving them a clearer idea of how much they can afford to borrow and helping streamline the home-buying process. Here’s how it generally works:

1.Understanding Pre-Approval vs. Pre-Qualification

• Pre-Qualification: This is a quick estimate from a lender of how much you may may be able to borrow, based on basic information you pr(like income, debt, ect.).

It’s not as rigorous as pre-approval. This assessment can be done by your Wealth Advisor or Mortgage Broker and should be the first step.

• Pre-Approval: This is a semi-formal process where the lender assesses your financial situation in detail and provides a specific loan amount, you’re eligible for, subject to finding a property. It is NOT a mortgage approval however and should never be seen as such. More about this below.

  
  

2. Documents You’ll Need

To get pre-approval for a mortgage, you’ll typically need to provide several key documents, including:

• Proof of Identity (e.g., Passport, driver’s license)

• Proof of income (e.g., recent paystubs, T4 slips, or notice of assessment from CRA)

• Employment details (e.g., contact info for your employer, job title, lenght of employment) Last three years.

• Proof of down payment(bank statements or gift letters, depending on the source of the down payment)

• Credit History (the broker or lender will pull your credit report to assess your credit score)

• Details of any existing debts (e.g., car loans, student loans, credit card balances)

• Your last three years addresses

  
  

3. Lender’s Assessment

The lender may evaluate several factors to determine how much you can afford to borrow:

• Income: How much you earn, both from salary and any other resources.

• Credit score: Canadian lenders typically want a score of 650 or higher, though this can vary by lender and type of mortgage.

• Debt Load: How much debt you currently carry, including monthly payments for car loans, credit cards, ect.

• Down payment: The size of your down payment will affect the loan amount and whether you need mortgage insurance.

• Assets: The lender may look at your savings and any other assets you may have to determine your overall financial stability.

  
  

4. Mortgage Rate Lock-in

When you get pre-approved, the lender may offer you a rate ‘lock-in” for a specified period (usually 60-120 days). This means you are guaranteed that rate for the pre-approval period, regardless of market fluctuations. If interest rates go up during this time, your pre-approved rates stays the same. If they go down, you can often secure the lower rate. This is one of the great benefits of obtaining a pre-approval, especially in a rising rate environment.

5. Pre-Approval Letter

Once a lender has reviewed your information and is satisfied, they’ll issue a pre-approval letter or similar electronic document to your mortgage broker. This document will detail:

• The maximum mortgage amount you could be approved for

• The interest rate (or range) you’re eligible for

• The term and amortization period

6. Validity Period

• Pre-approvals in Canada are usually valid for 60-120 days, depending on the lender. During this period. you can shop around for a home, knowing how much you can afford with some degree of certainty. After the validity period expires, you may need to get pre-approved again if you haven’t yet secured property. We generally recommend you only get pre-approved once you have decided on looking for a home and have discussed you pre-qualification amount with your Wealth Advisor or Mortgage Broker. You certainly do not want to continue to get pre-approvals with each credit check potentially lowering your credit score.

7. What Pre-Approval Doesn’t Guarantee Final Approval:

• Pre-approval is not a guarantee of mortgage approval. This is an extremely important point that many people seem to misunderstand. The final approval will depend on factors like the actual property’s condition (which could affect its value), the appraisal, and the lender’s internal policies. The final approval could also be affected by financial changes in the applicants situation since the pre-approval was done.

• Specific Property: Pre-approval is based on your financial situation but is not tied to a specific home. The pre- approval is a financial opinion by the lender and never attached to a specific property. Once you find a home, the lender will re-assess the property you wish to borrow against and confirm that it meets their lending criteria.

8. Benefits of Getting Pre-Approved

• Better Budgeting:  You’ll know your price range, making it easier to focus on homes that fit your financial situation.

• More Competitive: Sellers are more likely to take you seriously if you’ve been pre-approved because it shows you have financing in place.

• Faster Process: Once you find a home, the mortgage process is usually quicker since much of the work has already been done.

• Rate Protection: If interest rates rise during your home search, you can lock in your rate for a set period.

Conclusion

Getting a mortgage pre-approval in Canada is an essential part of the home-buying process. We recommend getting a pre-approval as it provides clarity on what you can afford, streamlines your search, and can make you a more attractive buyer. It’s important to gather all necessary documents, understand the conditions of your pre-approval. Finally, keep in mind that the pre=approval amount is subject to change based on the property you choose and your ongoing financial situation.

Contact our office if you would like to learn more about the Pre-Approval process and let us help you on the journey to becoming a homeowner.

Disclaimer and Notice to Reader: This Discussion Paper should not be construed as legal or tax advice but rather only as a general statement and explanation of the topic matter. Professional tax and legal advice should be obtained for the readers own personal situation. For more information on this topic or how it applies to your family, please contact our Wealth Advisory team.

Last Edit Feb 4, 2025