Thinking of buying a home? Before you start house hunting, consider getting a mortgage pre-approval. It’s one of the first key steps in the buying process and it can save you time by helping you focus your search.
Having a mortgage pre-approval means you’re starting your purchase project on the right foot. In fact, many real estate agents now require this document before showing properties to potential buyers.
Not sure how to get yours? Read our full article.
What is a mortgage pre-approval for?
A pre-approval helps you identify which lenders are willing to support your home purchase, and how much mortgage financing they would likely offer. It’s the best way to determine your borrowing capacity, the maximum amount you can invest in your future home.
It also serves as a rate guarantee: your lender locks in your mortgage rate for a set period, typically between 30 and 120 days. Of course, you’re under no obligation to proceed with the loan and if interest rates drop in the meantime, you can still benefit from the lower rate.
On top of that, a pre-approval can make your offer more attractive to sellers, especially if multiple buyers are interested in the same property. In short, a mortgage pre-approval shows that you’re serious and that matters in real estate.
How to get a mortgage pre-approval?
Ready to take the next step and apply for a pre-approval to find out how much you can borrow? Here’s how to do it.
1. Choose how you want to get your mortgage pre-approval
There are two main ways to obtain a mortgage pre-approval:
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On your own
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Through a mortgage broker
If you choose to go it alone, you’ll need to shop around for mortgage rates from various financial institutions and submit a separate application to each one. Not only is this time-consuming, but it may also carry risks for your credit file, especially if your application is declined.
The other option is to work with a mortgage broker, who will compare rates on your behalf. This approach can save you a significant amount of time and typically results in better terms.
Mortgage brokers have a strong understanding of each lender’s approval criteria. They can guide you on whether to submit your application to a specific lender or not. That means you’re more likely to secure your mortgage at the best possible rate and without delay.
Protect your credit score
Did you know that applying for a mortgage pre-approval on your own could negatively affect your credit score? Under Canadian law, banks must report every mortgage application that results in a refusal. If all lenders approve your request, there’s no impact. However, if one or more deny it, your credit file may be affected.
That said, this issue doesn’t apply if you go through a mortgage broker. That’s because the broker only shares your financial information with lenders, not your identity. Even if you’re turned down, your credit score remains untouched.
2. Fill out the mortgage pre-approval application form
The second step is to provide your personal information and complete the mortgage pre-approval application form. To do so, you’ll need to submit several documents that confirm:
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Your identity
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Your credit score (which ranges from 300 to 900 and helps lenders assess the risk of lending you money)
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Your financial situation, including proof of employment and status (salaried or self-employed), overall financial position, debts, etc.
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Your down payment, the amount you plan to contribute upfront when buying the property
On this last point, remember: the higher your down payment, the more you’ll save in interest over time. In Canada, the minimum down payment is 5% of the home’s purchase price. So, if you plan to buy a $400,000 property, you’ll need to put down at least $20,000.
However, if you want to avoid mortgage loan insurance, you’ll need a 20% down payment, which amounts to $80,000 for that same home.
3. Calculate your debt ratio
Calculating your debt ratios is a crucial step in qualifying for a mortgage. There are two main ratios to consider: the gross debt service (GDS) ratio and the total debt service (TDS) ratio.
These two ratios help lenders assess your repayment capacity based on:
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Your gross annual income (before taxes and deductions)
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Your housing expenses, including:
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Monthly rent or mortgage payments
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Heating
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Electricity
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Home insurance
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Condo fees
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All related property taxes
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Your monthly car loan payments
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Any other debt-related payments (e.g., student loans, financing for furniture or appliances, child support, etc.)
Please note that non-debt-related expenses like groceries, phone plans, or transportation are not factored into the calculation of your debt ratios. However, it is strongly recommended to include them in your personal budget planning.
Example calculation
Let’s take the following example: A couple has a gross annual income of $120,000, housing expenses totalling $2,800 per month (including rent, heating, and other related costs), a $800 monthly car lease, and $500 in other loan repayments.
In this case, their debt ratios would be:
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GDS: 28%
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TDS: 41%
Both are considered healthy levels. As a guideline, GDS should generally not exceed 39%, and TDS should remain below 44%, according to standards set by the Canada Mortgage and Housing Corporation (CMHC). Some lenders may apply stricter criteria, such as requiring a GDS below 32%.
4. Confirm your borrowing capacity and submit your application
A full assessment will be conducted based on your financial situation, including your income, rent or housing costs, credit score, existing debts, and down payment. This analysis will determine the maximum mortgage loan amount you’re eligible for.
Based on the results, your mortgage broker can then direct you to the lenders where your application is most likely to be approved.
5. Get approved by the lender... or not
This is the moment of truth: you’ll find out which financial institutions are willing to offer you a mortgage and how much they’re prepared to lend.
It’s important to remember that each lender has its own mortgage policies and approval criteria. There is no guarantee that any bank is obligated to approve your application.
Your mortgage pre-approval may be denied for various reasons, such as a poor credit history, an unfavourable debt ratio, or other financial concerns. If that happens, your mortgage broker can help you explore alternative options, such as:
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Reassessing your target home price and lowering your budget
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Increasing your down payment to improve your borrowing capacity
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Asking a co-signer to join your application
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Turning to alternative or non-traditional lenders
Keep in mind that alternative lenders may agree to work with you, but they typically offer higher mortgage rates due to the increased risk involved.
Important note: Receiving a mortgage pre-approval does not mean your application is fully guaranteed. Several factors, such as job loss, divorce, or poor financial decisions, could still lead to a denial, even after a favourable pre-approval.
How long is a mortgage pre-approval valid?
The validity of a mortgage pre-approval generally ranges from 30 to 120 days, depending on the financial institution or lender. During this time, your mortgage rate is locked in at the rate in effect when the pre-approval was issued. This means you’re protected if rates go up and if they go down, you can still benefit from the lower rate.
However, this validity is not guaranteed. You must continue to meet the original conditions of your application. For example, if your financial situation changes, the lender may reassess or withdraw the pre-approval.
If your pre-approval expires before you find a property, don’t worry, you can usually request a new one. However, this will involve repeating the entire verification process. That’s why it’s best to have a clear idea of your timeline and needs before applying.
Who pays the mortgage broker?
In most cases, you don’t have to pay the mortgage broker for their services. They’re typically paid by the lender, through a commission, once a mortgage is finalized. So you can benefit from professional guidance and support at no cost to you.
Are you looking to get a mortgage pre-approval?
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