Any good mortgage professional will tell you that your house hunt shouldn’t start with a call to your realtor; it should start with a call to a mortgage professional who will work with you in order to obtain a mortgage pre-approval. After all, how can you shop for property when you don’t know how much money you have to spend or, more importantly, how much a lender will loan you for your mortgage?
And that’s what a mortgage pre-approval is: the process of determining whether a borrower meets a particular lender’s guidelines for a home loan. It shouldn’t be confused with a mortgage pre-qualification, which is a much more cursory look at your financial picture. A mortgage pre-approval gives you some confidence that you are a qualified borrower in the eyes of a lender. This is beneficial because the last thing you want when going through the home buying process is to have done your own calculations and have figured out what you think you can afford using a mortgage calculator and the available interest rates, then apply for a mortgage with a lender and receive an entirely different interest rate based on your overall strength as a borrower. To avoid any nasty surprises, it’s best to get pre-approved before doing anything else. (Apart from saving money, of course!)
The pre-approval process
The pre-approval process can start anywhere up to 120 days before you want to buy a home, depending on how long the lender’s pre-approval is guaranteed. It’s the first step to getting a mortgage, and although it typically doesn't take that long to complete, another benefit to doing it early in the process is that you're not simultaneously dealing with offer negotiations, when every moment can be crucial. For a mortgage pre-approval, you have to provide supplemental documentations proving your income, the source of your down payment, and your assets and liabilities. The lender will also look at your credit report to determine your credit-worthiness.
According to BMO, you (and other applicants, if more than one person is applying) will need to provide the following information:
- Photo ID
- A record of employment income such as a paystub, T-4 slip or a personal income tax return (if you are self-employed, at least two years of Personal Income Tax Returns and Financial Statements)
- A letter from your employer stating the length of employment and current salary
- The account numbers and locations of your bank accounts and investments
- Proof of assets, such as
- Vehicles
- Boats
- Investments and interest income
- Retirement savings accounts
- Collections
- Jewelry
- Other real estate holdings
- Proof of liabilities, such as
- Existing mortgages
- Credit card balances
- Car loans
- Student loans
- Lines of credit
- Co-signed or guaranteed loans
- Liens
- Child support
Some lenders will give you written confirmation or a certificate as proof of pre-approval. It’s important to note that when you’ve been pre-approved, the only thing that’s being guaranteed for the 60-120-day period is the interest rate. The process vets you as a borrower, but it is not a guarantee that you will get a mortgage, or the amount that you will be loaned, because property details have yet to enter the picture. Keep in mind that ultimately, you don’t have to stick with the lender that gave you a pre-approval.
There are a number of reasons why you’d want to get pre-approved. For starters, it’ll speed up the home buying process. A file has already been opened for you with your lender, and you’ll be providing additional information to what’s already there. It will also give you a much more accurate assessment of the amount of money that you’ll have at your disposal for your property purchase. A pre-approval will show to your realtor that you’re serious about buying a home, and it will do the same to sellers, which means that the offer that you end up presenting may be stronger than a buyer’s offer without a pre-approval. To a seller, a pre-approval means that your financing is less likely to fall through than it would be without a pre-approval, and in a strong real estate market, every advantage helps.
Remember, the amount for which you’re pre-approved is not guaranteed. The only thing that’s locked in is the interest rate. This not only gives you another tool to better estimate monthly costs, but it also protects you against rising interest rates in the near future. If rates rise during the period in which the pre-approval rate is valid, then you will be given the rate that was guaranteed for the pre-approval. If rates fall, don’t worry – you will be given the lowest rate available. And even though it’s a good idea of the size of mortgage a lender will approve, it doesn’t mean that you should look for a property with the price tag that matches the number you’ve been given.
“When lenders determine capacity to borrow . . . house maintenance and the updates required on a regular basis is not part of that calculation, nor are daycare costs, and so on and so forth,” says Rona Birenbaum, financial planner and founder of Caring for Clients. “Quite often what happens is, without proper advice, an individual will borrow way more than what they can afford when all of those other expenses come up. Because a lender really isn’t concerned about those things, unless they’re dealing with a banker who is taking all of their life circumstances into consideration. More often than not, we recommend a borrowing level that is quite a bit less than what they’re approved for from their lender.”
Pitfalls of pre-qualification
You’ll undoubtedly see many offers here and there for mortgage pre-qualification, which is different than a mortgage pre-approval. A pre-qualification is often a series of questions relating to income and can be done either face-to-face, over the phone, online, or increasingly, with a mobile app. These quick-click pre-qualification tools are a great way to begin a conversation with a mortgage specialist about the mortgage process as well as what you may or may not be able to afford based on your current income and savings potential, but pre-qualification “results” don’t provide much information at all in terms of the amount of mortgage that you will be loaned. Again, the figure you’ll get is just the roughest of estimates. For some people, that’s all they want, especially if they don’t anticipate getting a mortgage for another six months or longer. But if you want more or want to buy within a couple of months, then a pre-qualification isn’t worth much to use going forward.
“There’s so much that can go wrong with pre-qualifying,” says Marty Coubrough, president and owner of VERICO One-Link Mortgage & Financial in Winnipeg. “Even at the bank level, somebody looking to purchase a home will assume the bank is going to do their due diligence, and that they’re completely qualified, and the lender reps will give them the green light to go buy a house. The buyers don’t know there’s a problem until they put in an offer on the house, the offer’s accepted and the lender finds out a financing procedure wasn’t done until this far along in the process, and the buyers can’t get the house.”
“Pre-qualification is just a discussion,” says Paul Gazzola, a mortgage planner with Mortgage Architects in Guelph. “I’ve seen a lot of situations where the customer says they’ve been pre-approved at the bank but really they’ve been pre-qualified and when they go to do their credit bureau, there are all these debts they didn’t mention that now jeopardize their pre-approval limits.” He adds he sees this scenario happen at least two or three times a month because some banks only offer mortgage pre-qualifications as opposed to mortgage pre-approvals.
What’s even more confusing is that some lenders don’t even provide pre-approvals. Victoria-based Greg Stanley, president and CEO of Home n Work Mortgages, says that some lenders decided that doing mortgage pre-approvals wasn’t worth the time and expense since buyers were shopping around and not always going through the mortgage process with a particular lender who granted them the pre-approval. Perhaps because of this, the terms ‘pre-approval’ and ‘pre-qualification’ are sometimes used interchangeably, although pre-qualification is based on unverified financial information, and true mortgage approvals are based on verified financial information, where a credit check is done.
Stanley says that because pre-approvals are loaded with conditions, it shouldn’t matter if you have a pre-qualification or a pre-approval, as long as you keep the “conditional on financing” clause in your offer to purchase.
Make sure you ask whether you’re getting a pre-approval or a pre-qualification before you do anything else to ensure that you have what you need for whatever next steps that you’re going to take. While pre-approved mortgages are always subject to conditions, if you verify your financial information upfront, you’re that much closer to getting the loan. If you provide everything upfront, you should only need to worry about the value of the property.
Final mortgage approval
Once you have a mortgage pre-approval you’ll have to watch out for anything that may affect your cash flow in the near future, such as acquiring any new debt or – obviously – losing your job. Even changing employers can affect your approval, so you want to keep your financial picture as stable as possible. If all remains the same from the time you got your mortgage pre-approval to the time you’ve made an offer on a property, then you’re halfway to your loan.
In order to complete the process after you make an offer on a property, your lender will ask you to provide the offer to purchase and/or MLS listing with the mortgage loan application. They will arrange for an appraiser to conduct a home appraisal on the property you wish to purchase to ensure that you didn’t overpay for the home – or, more accurately, that they’re not lending you more money than the fair market value for the home. If you have less than 20% for a down payment and require mortgage insurance, then the property also has to meet approval from the mortgage insurer, be it Genworth Canada, Canada Guaranty, or Canada Mortgage and Housing Corporation (CMHC).
Your lender will update any of your financial information that has changed (if any), add the specific property details to the equation, re-verify your credit score, income, and debt, and factor in the particular mortgage product that you’ve chosen.
If everything goes smoothly and you get final mortgage approval, congratulations – you’re on your way to closing!
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