Getting a Mortgage Pre-Approval in Canada

Serious about buying a home? Get mortgage pre-approval before you start house hunting. It simplifies the process and shows real estate agents that you are a serious buyer.  

Continue reading to find out what mortgage pre-approval is and how to approve your chances of getting it.  

What is mortgage pre-approval?

Mortgage pre-approval is a letter that shows the loan amount a financier is willing to lend you to purchase your home. It proves the lender is willing to work with you, provided the following two conditions are met:

• The property you want meets certain standards

• There is no drastic change in your financial situation while you are in the process of purchasing the home

The pre-approval is based on a number for factors. These include your annual income, financial profile, assets, and debts. Before issuing pre-approval, the lender makes a request to review your credit history. Equipped with this important information, the lender can make an informed decision regarding:

• The maximum loan amount they can offer you

• What are your monthly mortgage payments and their interest rate

• What your estimated monthly loan repayments will be

A mortgage pre-approval letter shows sellers that the lender has perused your credit profile and assessed how much mortgage you can afford. However, it does not guarantee you will get financing.

So, why is a mortgage pre-approval important?

The letter shows sellers that you have already found a lender who is willing to give you a home loan. It assures them that they are dealing with a serious buyer.

Why do you need to get pre-approved?

Sitting on the fence about getting mortgage pre-approval? Here are five compelling reasons why you should get pre approved before you start perusing the real estate market.

Simplifies the house searching process

Pre-approval demonstrates how much of a loan you can get. The pre approval process, in turn, can help save the hassle and time of checking out properties that are too expensive for your budget, not to mention the disappointment of falling in love with a home that you simply cannot afford.

Gives an added advantage in a bidding war

In a multi-offer scenario, having pre-approval can be the key to winning the bidding war. Sellers do not just look at the price when selecting a buyer; they also want reassurance that the selected person qualifies for a home loan. Mortgage pre-approval can put you a step ahead of other potential buyers who are not pre approved since it shows your loan is almost as good as approved.  

Helps you close faster

It takes roughly 50 days to close on a property. However, pre-approval can speed up the process, which can work to your advantage if the seller is keen to close the deal sooner rather than later. Once the price is agreed upon, the first step for the buyer is finding a home loan. Since you have already taken care of that, you can go to the next stages, such as home inspection and appraisal.

Some lenders may give you a 90-130 day interest rate lock

Once the pre-approval goes through, the lender may lock in the interest rate for a short period, usually 90 to 130 days. Even if the interest rate increases during this time, you still get the loan at the promised interest rate.

Gives you more room to negotiate

Mortgage pre-approval not only makes you an attractive buyer but also gives you more bargaining power. Since the seller knows you are a qualified buyer, they may be willing to accommodate certain demands, like covering the closing costs, if that will help close the sale.

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What you need for mortgage pre-approval

Shopping for a new home can be a lot of fun, but for serious buyers, the pre approval process starts not at an open house but rather in a lender’s office. Most sellers expect buyers to have this letter in their pocket when they come for a house inspection.

However, getting a mortgage pre-approval letter is not like buying a cup of coffee. You simply cannot walk into a lender’s office and walk out with it in your hand. To get mortgage pre-approval, you must submit the following documents and show some patience, with a typical lender taking roughly 10 days for pre-approval.

• A recent pay stub – Mortgage lenders want to ensure you have a steady cash flow coming in.

• Income tax returns from the last two years – It helps them check your employment history and whether you have a history of steady income.

• Bank statements and investment account statements – Mortgage brokers need these to make sure you have funds to cover the down payment and other expenses, like closing costs.

• Good credit score – For securing a mortgage, any score above 650 is considered good. But if you want the lowest interest rates, you will need a credit score of 700 or higher.

• ID (such as a passport or driver’s license) – This helps lenders to verify your identity and nationality. Non-residents can get mortgage, but it is a bit more complicated.  

How to actually get pre-approval

Getting through the pre-approval process is not free, so do not forget to shop around for the best interest rate and required down payment amount. During the evaluation of the pre approval process, lenders will make a request to review your credit report. Therefore, before you apply ensure your credit score is good.

You can personally contact various lenders to determine how much loan they are willing to offer you and at what interest rates. Alternatively, you can contact a mortgage broker, who will do all the leg-work for you. Since they get paid by the lender, you can rope in a local broker without worrying about the cost.

Regardless of the option you pick, you will have to keep the following documents ready:

• Proof of income

• Proof of employment

• Position and length of time with your current employer

• Bank statements and investment account statements

• Outstanding debts

• Your identification

• Down payment

• Notice of assessment from the Canada Revenue Agency for the last two years (if you are self-employed individual)

• Permission to give the lender access to your credit report

Depending on your lender, you may receive an answer anywhere between 48 hours to 10 days. Once you have a formal approval letter, you will know exactly how much you can afford. However, you may want to keep a part of your housing budget for additional expenses, like closing costs, ongoing maintenance, moving costs, etc.

Where can you get a mortgage pre-approval?

You can get a pre-approval from a mortgage lender or a mortgage broker.

Mortgage lenders

These are financial institutions that underwrite and offer home loans. Examples include:

• Banks

• Credit unions

• Insurance companies

• Mortgage companies

• Loan companies

• Trust companies

Loan requirements, interest rates, and down payment requirements may vary by mortgage lender. Contact several providers to give yourself the best chance to get the best mortgage at the best price.

Mortgage brokers

A mortgage broker acts as an intermediary between a mortgage lender and you. In other words, they do not lend you money but instead find lenders who will. Generally, mortgage brokers work with a large number of financial institutions and as such may be able to offer more options. Also, they usually earn a commission from the lender when they close a deal, so you do not have to pay them anything. Besides you'll have plenty of mortgage payments to make.

Tips for mortgage pre-approval

Shop around for the best interest rate

Mortgage interest rates vary by lender. Even quarter a percentage point can save you thousands of dollars over time, so do not forget to compare interest rates. That is the only way to ensure you get the best deal.

Collect all required documents

As we mentioned earlier, mortgage lenders will want to see certain documents before issuing pre-approval. Generally, they ask for a recent pay stub, bank statement and investment statements, ID, proof of assets available for a down payment, and information regarding debts. Some may also request additional documents, so ask beforehand about all documents you need to submit.

Stay reachable

Your lender may want to clarify something or need additional information, so make sure you are reachable by email or phone. If you are not, the lender may stamp your application as rejected.

Common mistakes that might result in you being denied pre-approval

Unfortunately, not everybody who applies gets pre-approved. Some common mistakes that can hurt your chances are:

• Unrealistic expectations. Make sure you apply for a figure that’s both reasonable and affordable.

• A poor credit score. If your credit score is below 620, you may have a hard time getting a pre-approval. Paying off your debt load, lowering your debt ratio, and making payments on time can help improve your score. Depending on your situation, this could take some time, but it is worth the effort.

• Error on a credit report. Before you apply, make sure information on your credit report is correct and up-to-date. An error in this all-important document can cause the lender to reject your application.

• Changing jobs. If there is one thing all lenders like to see, it is steady employment

If the lender has turned your application down, it is not the end of road for you. Depending on the reason for rejection, you may have several options.

But first find out why you were not accepted. Was it because you did not meet the qualifying criteria? Was your down payment amount too small? Some lenders have more stringent requirements than others, so check if other lenders are more accommodating. Your local bank or credit union (if you are a member) might be more willing than others to offer you a pre-approval, so why not start from there? If you were turned down because of a poor credit score or a checkered career, perhaps you could ask a parent to become a co-signer. Alternatively, you may consider applying for a lower amount.

Conclusion

Mortgage pre-approval simplifies the home buying process and makes you an attractive buyer. It tells you how much loan you can qualify for and ensures you shop for only those homes that are within your budget. It also conveys to the seller that you are a serious buyer, giving you more negotiation power and a better chance to outbid other interested buyers. A pre-approval does not cost you a thing, so it makes a lot of sense to have it in your hand before looking to buy a home.