This piece was originally published on February 9, 2021, and was updated on December 30, 2022.
Becoming a homeowner is a life-long dream for many Canadians. But, as with all new experiences, there’s uncertainty, and you may second-guess yourself once or twice. You’ll be interviewing realtors, looking at homes, worrying about bidding wars, and of course, actually qualifying for a mortgage.
Getting a pre-approval is one of the best things you can do to simplify the process and give yourself more confidence in your buying power. A pre-approval lets you know how much you are able to borrow with minimal risk. However, as with anything to do with mortgages, you'll want to understand the pre-approval process before you get started.
5 mortgage pre-approval tips (the dos)
The mortgage pre-approval process isn’t rocket science, but it is very important. Read and follow these five tips and you’re likely to get a great deal on your mortgage.
1. Apply for a mortgage pre-approval first
Most Canadians think the first step in the homebuying process is to contact a realtor and start looking at homes. This isn’t correct. The first thing you should do is apply for a mortgage pre-approval. After all, if you find a home you like, you’ll want to move quickly. Being pre-approved for a mortgage removes an extra step in the process.
Being pre-approved also helps you know how much you can afford to spend. You can get a good estimate of how much you can afford with our mortgage affordability calculator. However, the hard limit will always be how much the bank will approve you for – a mortgage pre-approval gives you that.
How long does it take to get a mortgage pre-approval? It can be done within an hour if you have your documentation together. Get in touch with a mortgage broker near you to get started.
2. Shop around for a great pre-approval rate
Just as you’ll see several homes before settling on ‘the one’, you should shop around for the best mortgage rate. Don’t just go to your local bank branch and expect to receive a great deal. Do your research and compare mortgage rates, or use a mortgage broker who will negotiate on your behalf.
Even half a percentage point can make a huge difference in your regular payments and the amount of interest you’ll pay over time. To see what we mean, plug your numbers into our mortgage payment calculator, then change the interest rate in small steps. You’ll very quickly see the difference!
What happens after your mortgage pre-approval? Generally, you’ll have a 90 to 120-day period where your offered rate will be held for you. This is when you should begin house-hunting!
3. Assemble your documentation
Collecting the documentation needed for a mortgage pre-approval and application can take time – it’s best to get started early. Ask your mortgage broker what documents are required to finalize your mortgage, and start gathering it all in one place.
Here’s a typical list to get you started:
- Identification: This proves you are who you claim to be.
- Bank account and investment statements: These prove to prospective lenders that you can pay your monthly payments.
- Proof of assets: Showing your assets, like a car, cottage or boat is important because it allows lenders to calculate your net worth, i.e. how much money you really have.
- Proof of income: To provide assurance to prospective lenders, pay stubs or a letter from your employer will do. A notice of assessment will be needed if you’re self-employed.
- Information about your debt: The information you need to provide includes student loans, car loans and credit cards. Lenders have access to databases of this information, and it will look bad if you try and hide it.
4. Stay in touch with your broker
Stay reachable in case your mortgage broker has any questions about your documentation. This means avoiding vacations or business trips where you won’t have access to email or phone during this period. If you aren’t available, they may make assumptions about your intent, and reject your mortgage pre-approval. If you absolutely must leave town, make sure to inform your mortgage broker in advance.
5. Read the fine print
Once you’ve been pre-approved, your loan officer will send through your pre-approval document. This document will outline the interest rate you’ll receive, the loan terms, and the mortgage amount you’ve been pre-approved for. It may seem like financial jargon, but it’s important to read the fine print on every page carefully. If you have a family lawyer or accountant, it’s a good idea to have them take a look as well.
Looking for a local mortgage broker?
Mortgage pre-approval mistakes (the don’ts)
The path to ruin is paved with good intentions, but it’s also paved with silly mistakes. Here are four rules that, if you stick to them, will help you achieve pre-approval success.
1. Don’t get pre-approved over your budget
Don’t make the upper ceiling of your mortgage pre-approval your maximum purchase price. Do your own calculations, figure out how much you can afford monthly (don’t forget the other costs associated with homeownership, not just the mortgage) and go from there.
When I sought pre-approval for a mortgage, it was because I was looking at a specific home well below my budget. I requested a mortgage pre-approval for the amount I’d need: $250,000. To my surprise, my mortgage broker told me they’d upped the amount to $300,000, and that there was “lots of wiggle room above that.”
Even though I’d requested a smaller pre-approval amount, I was pre-approved for much more. While this suited me because my final budget was actually $300,000, you should know that the mortgage you’re pre-approved for could be more than what you can actually afford. I could have been pre-approved for much more and been tempted to use it to buy a more expensive home, even if I couldn’t afford it.
2. Hold off on major purchases
Once you’ve submitted your documentation to your loan officer, your financial situation shouldn’t change from pre-approval to loan finalization. Changes to your financial situation could ultimately result in loan rejection, even if you were initially pre-approved. To avoid rejection, don’t make any major purchases that change your debt service ratios.
3. Don’t apply for new credit
You also shouldn’t apply for new forms of credit, like a personal loan or credit card, and don’t co-sign a loan for a friend or family member. Your debt level and available credit are both factors in mortgage approval, so increasing them may risk your pre-approval.
4. Don’t quit or change jobs
Finally, try to avoid changes to your employment status after you’ve been pre-approved. Steady and predictable income is crucial to most mortgage applications. Changing jobs or becoming self-employed will most likely throw a wrench into the mortgage approval process. Instead, if possible, hold off changing employers or starting a company until after you have the keys to your new place. If you have a job offer that's just too good to pass up, you can learn more about how to handle changing jobs while house-hunting without necessarily jeopardizing your pre-approval.
If the worst should happen, and you are fired or made redundant, it’s probably a good idea to delay buying a home until you regain financial stability.
The bottom line
As with many things in life, planning ahead makes all the difference. After all, getting a mortgage pre-approval is its own form of forward planning! Take the time to get your finances in order before you apply for a mortgage pre-approval, shop around for the best rate and keep your finances consistent. Achieve that, and you should expect a seamless transition from pre-approval to your move-in date.
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