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What is a mortgage pre-approval in Canada

You can take an important step before beginning your hunt for your ideal property, and that is getting pre-approval for your mortgage. This will save you time and potential heartache during your property hunt by making your whole process far simpler.

A pre-approved mortgage will help you understand exactly what you can afford, and therefore what your budget range is when looking at properties. Not only will you gain an understanding of your budget, but you also gain an understanding of the mortgage rate you will receive before submitting an offer on a property. This will protect you if there are any increases in rates while you’re searching for a property and putting your offer down.

What is a Mortgage Pre-Approval?

A pre-approval, or often called a ‘Mortgage in Principal,’ is a commitment from your lender/mortgage provider to lend you a specified amount of money at a specified interest rate. The benefit of getting pre-approval is that you will find out exactly the maximum amount you can afford to offer a property. For example, if you get pre-approved for $500,000, there is no point in looking at $550,000 properties as you know exactly your maximum budget. You will also receive your rate as a part of your pre-approval, so you can utilize this to calculate what your monthly payments will likely be when looking at each property.

Mortgage pre-approval is a free service, and there is no commitment to the lender if they provide pre-approval. This is also a great way to compare different lenders, as some may be willing to lend you less with lower rates at different times.

Normally a lender will hold your pre-approved rate for you for 120 to 160 days, and after that, you would need to go through the process again. It would be wise to go through the mortgage pre-approval process just before you plan to start viewing properties; that way, you can take advantage of that holding window for as long as possible. It is important to keep in mind that if the interest rates significantly change after your holding period runs out and you need to reapply for pre-approval, you will receive the new rates and not the previous rates offered.

However, if rates fall during the holding period of your pre-approval, the lender will most likely honour the lower rates they are now providing.

This all said, there is no guarantee that a pre-approval will lead to that exact rate being applied to your mortgage. Some factors can change between your pre-approval meeting and finally closing on the property. The lender will do a final check over your personal circumstances when you have had your offer accepted, and they may alter the rates slightly if they deem you to be a slightly higher risk since the first offer.

How to Get Pre-Approval for a Mortgage

You can either go down the route of meeting with a mortgage broker or directly go straight to the lender. The meeting will lead to them asking you a myriad of questions, and your responses will normally require supporting evidence or documentation.

The supporting documentation you will likely require:

  • Identification (Drivers license or passport)
  • Proof of Income (Payslips and a letter from your employer)
  • Details of your length of time with your current employer
  • Proof of assets owned.
  • Information about debts. Including:
    • Credit cards
    • Student loans
    • Car leases
    • Personal loans

What do I do after I Receive Mortgage Pre-Approval?

Once you have received confirmation of your pre-approval, you will know exactly what the upper limit on your mortgage will be, and therefore what the maximum budget you will have on your property is.

With your pre-approval, you will be protected against interest rate increases for 120 to 160 days while you look for your dream property. With this information, you can now begin your house-hunt with confidence.

Mortgage Pre-Approval Limitations

It is always wise to keep in mind that there is no guarantee that your mortgage application will be approved; therefore, it is always somewhat wise to go on the side of caution. For example, if you have been pre-approved for $500,000, it might be wise to aim slightly lower than that, so there is a window of breathing room. If your financial situation changes before your final mortgage application, it could be the difference between being accepted or rejected.

Other factors come into play too. For example, the lender will examine the property you are purchasing, and if it doesn’t meet their required criteria, you may have your mortgage rejected, even if you have had pre-approval. This can often happen on older properties with asbestos or electrical issues.

Your pre-approval only represents how much your lender would be willing to lend to you. It isn’t an indication of how much exactly you should spend. Going below the pre-approved amount will always be more beneficial from a budgeting standpoint and likely to stretch your finances significantly less.

Factors in your Mortgage Pre-Approval

There are various factors that the lender will consider when looking at your pre-approval process. Some of these can be summarised as:

  • Down payment availability: A lender will only be able to lend you a certain amount based on your down payment, even if you earn way above expectations and your credit score is perfect. If your deposit is only 5%, then you are limited.
  • Your credit score: Possibly one of the biggest contributing factors in terms of whether a mortgage will be approved or rejected, as well as how good your rate offerings will be
  • Debt service ratios (Gross + Total Debt Service Ratios): The requirements will vary depending on the lender, but mortgage default insured loans will require to be under a certain level for both Gross and Total debt service ratios
  • Evidence of supporting documentation: If you cannot provide evidence for certain important claims, your mortgage pre-approval may get rejected. For example, if you cannot evidence you earn $100,000 per year, or you cannot provide evidence of asset ownership.
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