A Guide to Mortgage Pre-Approval
Jamie David, Sr. Director of Marketing and Mortgages
Before you start the house-hunting process, there’s an important step you can take that will both save you time and make the process easier: getting pre-approved for a mortgage. A pre-approval helps you understand the home price you can afford, allowing you to budget for your home purchase and focus your home search. With a pre-approval, you’ll also be able to secure a great mortgage rate offer ahead of time and protect yourself from rate increases during your home search.
What is a mortgage pre-approval?
A pre-approval is an in-principle commitment from a mortgage provider to lend you a certain size mortgage at a particular rate. When you get pre-approved for a mortgage, you’ll find out the maximum amount you can afford to spend on a home, the monthly mortgage payment associated with your maximum purchase price and what your mortgage rate will be for your first mortgage term.
Applying for a mortgage pre-approval is free and doesn’t commit you to a lender. However, getting pre-approved does hold the mortgage rate you are offered for 90 to 120 days. This means you're protected if interest rates rise while you’re shopping for a home. If interest rates go down during this time, your lender will honour the lower rate when it comes time for your actual application. That said, a pre-approval isn't a full guarantee you'll receive that rate. That relies on your finances staying the same when you finally apply for your mortgage.
Current mortgage rates
There are plenty of reasons to look for a mortgage pre-approval, but one of the most important considerations should be trying to get the lowest rates possible. We can help you with that.
We shop the most competitive lenders, banks and credit unions in Canada to bring you today's lowest interest rates, free of charge. Have a look at the most up-to-date advertised mortgage rates in the table below. Click "inquire" to start the process.
Why get pre-approved for a mortgage
Getting pre-approved for a mortgage helps you in several ways. It saves time in your home search, because you’ll only look at homes in your price range. Getting pre-approved is also a signal to your real estate agent that you’re serious about buying, and you’ll receive faster, more targeted service. Finally, when it comes time to make an offer on a home, the fact that you are pre-approved signals to the seller that you should have no problem financing the purchase, which will improve your chances in a competitive offer situation. Don’t forget that if interest rates fall while you are locked in, your lender will honour the lower rate when you actually apply for your mortgage.
How to get pre-approved for a mortgage
To get pre-approved, you must meet with either a mortgage broker or a lender. To determine how much you can afford to borrow to purchase a home, they will ask you a series of questions, and you will need to provide some supporting documentation.
Watch the video below to see what factors a lender uses to determine how much mortgage you can afford:
Factors in your mortgage pre-approval
The following four factors play a role in determining how large a mortgage, and at what rate, you'll be pre-approved for.
1. Credit score
Your credit score is a measure of your financial health, and shows lenders how risky it may be to lend you money. If your credit score is between 680 and 900, you’ll qualify for a mortgage with an “A” level lender, such as a major bank.
If your credit score is below 680 and above 600, lenders will look at the other details of your finances to determine if you can qualify with an “A” level lender or not. If you don’t qualify, you’ll need to go through a “B” level lender, such as Home Trust, to get a mortgage pre-approval.
If your credit score is below 600, you will only qualify for a mortgage with a “B” level lender, and you won’t get today’s best mortgage rates.
2. Down payment
Your down payment is the lump sum of money you’ll put towards the purchase of your home. In Canada, the minimum down payment you must make is between 5% and 20% of the home’s purchase price (depending on the price). If you put down less than 20%, you’ll have to buy mortgage default insurance (also sometimes called CMHC insurance, though there are multiple mortgage default insurance providers) to protect your lender in case you default on your loan.
The size of your down payment affects how much you can borrow. For example, if you wanted to buy a house worth $300,000, you would need at least a $15,000 down payment.
$300,000 x 5% = $15,000
Minimum down payments in Canada:
The minimum down payment in Canada is 5% for homes costing less than $500,000. For homes priced between $500,000 and $1 million, you need to put down 5% of the first $500,000, then 10% of any amount over $500,000. For example, a house worth $600,000 would require a down payment of at least $35,000.
($500,000 x 5% = $25,000) + ($100,000 x 10% = $10,000) = $35,000
For houses priced over $1 million, a minimum 20% down payment is required.
3. Debt service ratios
Your debt service ratios are two calculations that lenders use to determine the largest monthly mortgage payment you can afford, based on your current monthly income, expenses and debt.
Lenders use these ratios to make sure you can afford to make your monthly mortgage payments, even with all of your other financial commitments, so there’s a smaller risk that you could default on your mortgage payments.
4. Supporting documentation
Depending on the mortgage broker or lender you sit down with, the documentation you’ll need to submit for your pre-approval may vary. For example, some mortgage brokers require proof of income for a pre-approval. Others won’t require proof until your offer has been accepted and you need to finalize your mortgage application.
Here is a list of documentation you may need to provide for your mortgage pre-approval:
- Identification (e.g. Canadian driver's license, PR card or passport)
- Proof of income (pay stubs and letter from your employer, or a notice of assessment if you are self-employed)
- Length of time with employer
- Proof of down payment and ability to pay closing costs (recent financial statements of bank accounts and investments)
- Proof of any other assets like a car, cottage or boat
- Information about other debts including: credit cards or lines of credit; spousal or child support payments; student loans; car leases or loans; and personal loans.
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After you receive a mortgage pre-approval
Once you’ve been pre-approved, you’ll know the maximum amount you can afford to borrow, as well as the mortgage rate lenders are willing to offer you. With your pre-approval, you’ll be protected from future interest rate increases for the next 90 to 120 days while you search for a home. You can then take the maximum mortgage amount and use it as a guide during your house hunt, so you only view homes you know you can afford to buy.
The limitations of a mortgage pre-approval
One thing to keep in mind is that getting pre-approved for a mortgage doesn’t guarantee that your final mortgage application will be approved. When you apply for a mortgage after your Offer to Purchase has been accepted, your lender will look at the details of the property to make sure it’s suitable. If the property doesn’t meet their qualification criteria, you won’t qualify for a mortgage. For example, if the home has asbestos, knob and tube wiring, is a heritage home or its appraised value is below the purchase price, the lender may not find it suitable and could deny you a mortgage.
Getting pre-approved for a mortgage also doesn’t mean that you should buy a home at the top of your price range. Your pre-approval amount only represents how much your lender is willing to lend you, not how much you should actually spend. You should choose to buy a home that is priced lower than your maximum purchase price, which will ensure you have enough room in your budget for saving and paying down debt.
If you need advice, you can always consult a mortgage professional, like a mortgage broker. Mortgage brokers are independent and can give you expert advice on your application for free. They can also help you compare mortgages and negotiate a better rate, and help you through the pre-approval process.
What credit score is needed for a mortgage pre-approval?
The minimum credit score required to qualify for a mortgage pre approval in Canada is around 620, with 700 and above being ideal to qualify for the most competitive mortgage rates. Generally, while A lenders will still consider an applicant with a credit score between 600 - 700, the remainder of their application must be strong in order to counter the higher chance of default they pose by having a lower credit score. Check out Understanding Your Credit Score to learn more.
Does a mortgage pre-approval mean you’ll get a mortgage?
While a mortgage pre-approval is a great indicator that you are in good financial standing to qualify for a mortgage, it does not guarantee that you’ll get one, or for the maximum amount the lender is offering. The value and condition of the property you wish to purchase can impact how much mortgage you’ll actually receive from your lender. For example, if your lender assesses that the home you’ve purchased is worth less than what you’ve offered to pay, they may only mortgage a portion of its price, leaving you to make up the difference. If your financial situation materially changes between getting your mortgage pre-approval and buying a home, that can also impact how much money your bank is willing to lend you.
It’s also important to keep in mind that a mortgage pre-approval represents the maximum amount your lender is willing to loan you, and that it’s financially prudent to purchase a home below your maximum affordability.
Can you get denied after a mortgage pre-approval?
Yes, it is possible to be denied a mortgage, even if a borrower has qualified for a pre-approval. The most common reason for this is the borrower’s financial situation has changed materially between getting the pre-approval, and actually undergoing the underwriting process for the mortgage. Anything that may change your debt servicing ratios can pose a threat to your mortgage pre-approval including buying a new car, taking out new lines of credit, or closing off credit cards. Co-signing for someone else’s loan, or even changing jobs can also make your lender reassess your mortgage pre-approval.
How long does it take to get a mortgage pre-approval?
Depending on the financial institution, it can take as little as an hour if you have your documentation ready! The most time-consuming aspect of getting a mortgage pre-approval is assembling all of the necessary paperwork that you’ll need to submit to your broker and/or financial institution, which include:
- Bank account and investment statements
- Proof of assets
- Proof of income
- Information about your existing debts
How can I speed up my pre-approval?
Getting a mortgage pre-approval can be quick and easy, as long as you’ve prepared ahead of time. Do some initial homework, like finding out your credit score, determine whether you’re likely to need CMHC mortgage insurance, and research how much you can borrow with a mortgage affordability calculator. Having all your necessary documents signed and prepped before can help speed up the process.
How far in advance should I get pre-approved for a mortgage?
It’s important to get your mortgage pre-approval before you start shopping around for a home, as it gives you a clear idea of what you can afford and allows you to hold today’s mortgage rates for 90 to 120 days. You don’t want to obtain your pre-approval too far in advance, or you may have to go through the process all over again if you need your mortgage after 120 days.
In today’s rising rate environment, if you know that you will be needing a mortgage within the next 120 days, getting a pre-approval can result in substantial savings as you may end up holding a rate that is no longer available by the time you need to get a mortgage. Even if rates were to drop during your rate hold period, your lender will honour the lower rate when you’re applying for your actual mortgage.
Does getting a mortgage pre-approval affect my credit score?
As part of the pre-approval process, lenders will pull your credit report. If your credit report is pulled more than three times within a 6-month period, this can lower your credit score. It’s therefore not advisable to obtain more than three mortgage pre-approvals within a 6-month period. A better option is to use a mortgage broker, who can compare mortgage rates across multiple Big Banks and other lenders so that you will only need to apply for a pre-approval once.