Mortgages: What is mortgage pre-approval in Canada?

One important step you can take before you start looking for the perfect property is to get pre-approved for your mortgage. This will save you time and headaches in your search for the perfect home by simplifying the whole process. A pre-approved mortgage will help you understand exactly what you can afford, and therefore what your budget range is when looking for properties. Not only will you understand your budget, but you will also understand the mortgage rate you will get before you submit an offer on a property. This will protect you in the event of a rate increase while you are looking for a property and making your offer.

A pre-approval, often referred to as a “mortgage”, is a commitment by your lender or mortgage provider to lend you a specified amount of money at a specified interest rate. The advantage of getting pre-approved is that you will know exactly how much you can afford to offer on a property. For example, if you are pre-approved for $500,000, there is no need to look at $550,000 worth of properties because you know exactly what your maximum budget is. You will also receive your rate as part of your pre-approval, and you can use it to calculate your likely monthly payment amount as you review each property. Mortgage pre-approval is a free service, and you will have no commitment to the lender even if they provide a pre-approval. It’s also a great way to compare different lenders, as some may be willing to lend you less and at lower rates at different times. Normally, a lender will hold your pre-approved rate for 120 to 160 days, after which you will have to start the process over. It’s a good idea to go through the mortgage pre-approval process just before you start looking at properties; that way you can take advantage of the pre-approval for as long as possible. It is important to keep in mind that if interest rates change significantly after your freeze period expires, and you need to reapply for pre-approval, you will receive the new rates and not the old proposed rates. However, if rates drop during the rate freeze period of your pre-approval, the lender will most likely honor the lower rates they are currently offering. That said, there is no guarantee that a pre-approval will result in this exact rate being applied to your mortgage. Some factors may change between the pre-approval meeting and the final closing on the property. The lender will do a final check of your personal situation once your offer has been accepted, and may change the rates slightly if they feel you are a slightly higher risk since the first offer.

You can either meet with a mortgage broker or go directly to the lender. During this meeting, you will be asked a multitude of questions and your answers will normally be supported by evidence or documentation. Supporting documents you will likely need include:

• Identification (driver’s license or passport)
• Proof of income (pay slips and letter from your employer)
• Information on the length of your contract with your current employer.
• Proof of your assets
• Information on debts. In particular:
  • Credit cards
  • Student loans
  • Car rental contract
  • Personal loans

Once you receive confirmation of your pre-approval, you will know exactly what your mortgage limit will be, and therefore the maximum budget you will have for your property. With your pre-approval, you will be protected from interest rate increases for 120 to 160 days while you search for your dream home. With this information, you can now begin your home search with confidence.

It is always wise to keep in mind that there is no guarantee that your mortgage application will be approved, so be careful. For example, if you have been pre-approved for $500,000, it may be wise to aim for a slightly lower amount to give yourself some wiggle room. If your financial situation changes prior to your final mortgage application, it could mean the difference between an acceptance or rejection. There are other factors as well. For example, the lender will review the property you are purchasing and if it does not meet their criteria, your mortgage application may be rejected, even if you have been pre-approved. This can often happen in older properties that contain asbestos or electrical problems. Your pre-approval is only the amount your lender would be willing to lend you. This is not an indication of the exact amount you need to spend. Going below the pre-approved amount will always be more beneficial from a budgetary standpoint and will put less strain on your finances.

The lender will consider several factors when reviewing your pre-approval process. Some of them can be summarized as follows:

• Down paymentavailability: A lender will only be able to lend you a certain amount of money based on your down payment, even if you earn a lot more than expected and your credit rating is perfect. If your down payment is only 5%, then you are limited.
• Your credit rating: This is probably one of the most important factors in approving or denying a mortgage, as well as in offering a rate.
• Debt Service Ratios (Gross + Total Amortization): Requirements vary by lender, but loans insured against default must be below a certain level for both gross and total debt service ratios.
• Evidence and Supporting Documentation: If you cannot provide evidence for certain important claims, your mortgage pre-approval may be denied. For example, if you cannot prove that you earn $100,000 a year, or if you cannot provide proof that you own property.