Getting a mortgage pre-approval is a necessary step in the process of buying a home, giving a home seller assurance that you have your finances in order.
What is a mortgage pre-approval?
A mortgage pre-approval is a statement, usually a letter, of how much money a lender is willing to let you borrow to pay for a home. The pre-approval indicates that the lender is prepared to move forward with the mortgage, as long as the home meets certain criteria and your financial situation doesn’t change significantly while you look for a home to purchase.
The pre-approval is based on your financial profile, including your income, assets, debts and your credit. With this information, the lender can make an informed estimate about how much house you can afford, and, if you qualify can pre-approve you for a certain mortgage amount.
Why should I get pre-approved?
In today’s housing market, you will be at a major disadvantage if you don’t have a pre-approval in place. There are simply too many buyers for sellers to be willing to take a chance on one who hasn’t at least talked to a mortgage broker about getting a mortgage.
Another important reason to get pre-approved: You’ll know up front what you can qualify for, and you’ll have your documentation ready when you find the ideal home and ready to submit an offer. It’s well worth taking the time to do that at the start of your home search to set yourself up for success. This can save you time and heartbreak during house hunting by eliminating properties out of your price range. Your REALTOR® can then help you find the right home within your budget.
When to get a pre-approval
The best time to get a mortgage pre-approval is before you start looking for a home. If you don’t, and you find a home you love, it’ll likely be too late to start the pre-approval process if you want a chance to make an offer. As soon as you know you’re serious about buying a home—that includes getting your finances in home-buying shape—you should apply for a pre-approval.
Getting your ducks in a row early will leave little room for unexpected surprises—such as a low credit score or a less than desirable debt-to-income ratio—when you find the home you’ve been looking for.
How long does it take to get pre-approved?
Once I receive your application and all of your documents, I can complete a pre-approval for you in as little as one business day, but once you factor in the pre-approval consultation it usually takes a few days. In general, if you have your paperwork in order and credit and finances look good, it’s possible to get a pre-approval quickly.
How long does a pre-approval last?
A mortgage pre-approval is valid for up to 120 days (4 months). If your pre-approval expired, getting it renewed can be as simple as rechecking your credit, finances and employment to make sure there have been no major changes to your situation since you were first pre-approved.
Mortgage pre-approval process
- Mortgage Application – The first step in getting pre-approved is to complete a mortgage application where you will provide your personal information including your full name, birth date, SIN, address history, employment history and information on your current assets and debts.
- Document Submission – To get pre-approved for a mortgage, you’ll need to supply documentation about your income and assets.
- Credit Check – In addition to providing documentation, you’ll also have to agree to a credit check. If you would like to check your credit report before a lender does, you can do so for free directly from Equifax and it does not impact your credit score. During the credit check, we will review your credit report and history.
- Pre-Approval Consultation – During this consultation, we will review your credit score, income, assets and debts and determine the amount of money you will be able to borrow to purchase a home. We will go through the home buying and mortgage process and answer any questions you may have.
Documents needed for a mortgage pre-approval
- Photo ID (Driver’s license) – Lenders need to make sure they know who they’re lending their money to, so they’ll want to verify your identity and that you’re a Canadian citizen.
- Letter of Employment – The letter must outline your start date, position status, gross wage, and contact for lender phone call verification. It also must be dated within 30 days, on company letterhead and signed.
- Pay stubs from the past 30 days – Your current income is a major consideration in getting pre-approved for a mortgage, so lenders want to see that you have a reliable, predictable cash flow coming in.
- Personal income tax returns (Notice of Assessments) – These will help to verify your employment history and show the lender a longer-term track record of your income with a two year history.
- T4 Slips – These will help to verify your employment history and are used to determine an average of your two most recent years history of employment.
- Bank or investment statements from the past 90 days – Lenders want to see where your money came from with a history of transactions, they will be looking for a clear, trackable history for all funds deposited.
Those who are self-employed will also need to provide two years T1 Generals, and if you are incorporated you will need to provide Articles of Incorporation and two years of Accountant Prepared Financial Statements.
What does a pre-approval letter include?
A pre-approval letter includes your name, the maximum purchase price you can qualify for, the mortgage amount you’re pre-approved for, an interest rate hold, and the expiration date of the pre-approval. The letter also outlines the cost of mortgage default insurance—if your mortgage will be insured—meaning you will be putting less than 20% down payment. Your letter will show what mortgage terms your pre-approval was based on, such as the amortization, mortgage term, and loan-to-value (LTV) ratio. Your pre-approval letter may also specify your down payment and monthly mortgage payment amount. Lastly, the letter also includes some conditions related to the pre-approval.
Does a pre-approval affect your credit score?
Getting pre-approved for a mortgage has an impact on your credit score. That’s because when lenders check your credit, they perform a hard inquiry as part of the mortgage application process, which can drop your score by a few points. The good news is that the effect is small, and if you have good credit it is not much to be concerned about.
Pre-approval vs. Pre-qualification
A mortgage pre-qualification is an indication of what you’ll likely qualify for based on basic information about your finances, but it’s not the same as a pre-approval. With a pre-qualification, your credit isn’t taken into account and we do not do an in-depth analysis of your affordability. However, a pre-qualification does give you the opportunity to talk with a mortgage broker about any specific needs or goals that you may have.
On the other hand, getting a mortgage pre-approval is a more thorough process. You’ll provide documentation to back up the information on your application, and a lender will review your credit report in more depth.
Pre-approval vs. Approval
A pre-approval is not a finalized offer; it’s one step on the path towards approval. Once you have an accepted offer on a property, we then submit to a lender for an approval.
To determine whether to fully approve and fund your mortgage, your lender will assess your application with an underwriting process. At this time, your lender will call your workplace to verify employment, evaluate the home you made an offer on and might ask for additional documentation, as well. Even if you’re pre-approved, it’s possible to still get denied for a mortgage for a variety of reasons. Once you’re fully approved for a mortgage, you’re ready to move forward with the closing.
If you want to get started with your pre-approval, you can Apply Now!
Tatum Neufeld, BComm
Mortgage Broker • Mortgage Tailors