What is a Mortgage Pre-Approval

Published: February 3, 2023

Far too often, Canadians mistakenly believe that the first step in the home-buying process is to connect with a realtor and view potential homes. However, this isn’t accurate – getting a mortgage pre-approval should be your first step. Knowing exactly what you can afford before shopping for a home is invaluable. It prevents any emotional distress around finding a place that’s simply out of reach financially.

A mortgage pre-approval is an important step in the home-buying process. Before you even start searching for the perfect property, securing a pre-approval should be your first priority if you’re a serious homebuyer. It will give you an exact understanding of the amount of mortgage you may be eligible for, but it will also give you insight into your monthly mortgage payment for budget planning purposes.

Here’s what you need to know about the mortgage pre-approval process.

Getting a mortgage pre-approval should be your first step before shopping for a home.
Knowing exactly what you can afford before shopping for a home is invaluable.

1. What is a Mortgage Pre-Approval?

Don’t be fooled! A mortgage pre-approval isn’t a promise that you’ll get a mortgage for the home you want to buy. A mortgage pre-approval only means that a mortgage professional has reviewed your finances. They have confirmed your employment, income, debt, assets, downpayment sources and credit history. Once your personal financial information has been reviewed, they will determine how much of a mortgage you are pre-approved for. You’ll also know what you can afford each month.

Once you’re pre-approved, you’ll receive a pre-approval letter. This letter confirms to realtors that you have started the process of working with a mortgage professional and that they are willing to work with you. Realtors will love you for it! They’ll have peace of mind, knowing they won’t be wasting their time with someone who couldn’t afford a house or looking at homes outside of their budget.

Although a pre-approval looks at factors like your monthly income and existing debt, your mortgage professional may ask for additional verification once it is time to close your mortgage. Be pro-active, be organized with all of the necessary documentation upfront. Just because your pre-approved doesn’t mean you’re out of the woods yet.

“Knowing exactly what you can afford before shopping for a home is invaluable; it prevents any emotional distress around finding a place that’s simply out of reach financially.”

2. Why would you want a Mortgage Pre-Approval?

When it comes to mortgages, a pre-approval does not guarantee approval. However, there are many benefits, which include the following;

  • It gives you confidence when house hunting.  Knowing how much mortgage you can afford means you won’t have to suffer from the emotional distress of adoring a home and realizing it’s beyond your financial reach. Start looking for homes within your budget, so you don’t experience these kinds of unfortunate surprises.
  • It provides you with a powerful advantage to seal the deal. Your mortgage professional has reviewed your personal financial information and has issued you a pre-approval letter. Your mortgage approval will go smoother with a pre-approval in place. All you need is for the rest of your application to be complete – then you’re ready to go!
  • It establishes your credibility as a homebuyer. A mortgage pre-approval shows realtors how serious you are about buying a home.  
Michael Cameron Mortgages - Canada's #1 Mortgage App.
Michael Cameron Mortgages | Mortgage App

3. Is a Mortgage Pre-Approval the same as Pre-Qualification?

Absolutely not! A pre-approval and pre-qualification are distinctly different processes, so it’s vital to understand the difference between the two.

A notable difference between pre-qualification and pre-approval lies in the thorough evaluation of your mortgage professional. To get pre-qualified, you simply discuss your income, liabilities, and assets with your mortgage professional or lender. They solely rely on the verbal information you provide without questioning it; then they tell you, “based on your information, you would qualify for this much of a mortgage.”

Nevertheless, the information you provide could be an estimate. Your numbers can be different from the actual information. If you’ve fudged your numbers, then a pre-qualification will only offer an approximate estimation, which may misrepresent your true capacity. It’s not a very accurate assessment of your current financial situation!! Check out our mortgage calculator if you’re looking to get pre-qualified.

Unlike a casual inquiry about your finances with your mortgage agent, obtaining a pre-approval requires more effort by both of you. Your mortgage professional will not only inquire as to how much money you make—they’ll require proof, and full transparency! They will examine your credit, validate all sources of income and assets, and evaluate your overall financial health before giving you that pre-approval letter.

4. What do you need to get a Mortgage Pre-Approval?

Since the pre-approval process can be rigorous, you’ll need to bring a number of documents when you meet with your mortgage agent. It pays to be organized. Here’s a small list to start with:

Identification

  • Provincial Driver’s license or Canadian Passport.
  • Social Insurance Number.
  • If you’re not a Canadian citizen, a copy of the front and back of your permanent residency card.
  • Employment verification. Your mortgage professional and lender want to know you have stable employment! They’ll likely call your current employer and ask about your employment and yearly salary.

Income

  • Recent Employment Letter – dated within 30 days,
  • Recent pay stubs covering the last 30 days,
  •  T4 Slips from the last two years,
  •  Proof of any additional income, Pension Letter, Spousal, Child support, Canada Child Benefit etc.,
  • Last years Notice of Assessment (NOA).
  • Self-Employed – your mortgage professional will have additional verification requirements.

Assets

  •  90 days’ worth of Bank statements proving you have enough to cover your down payment and closing costs.
  • If an immediate family member is helping you with the down payment, you will need a financial gift letter.
  • Last quarterly statements for asset accounts, including your RRSP, TFSA, Stock and Mutual Funds.
  • A list of additional properties. Include mortgage statements and property tax statements if applicable.

Michael Cameron Mortgages | Complimentary Mortgage Guide
Michael Cameron Mortgages | Complimentary Mortgage Guide

5. How quickly can I get pre-approved?

As long as you have all the paperwork prepared, securing a mortgage pre-approval shouldn’t take longer than a day after discussing it with your mortgage professional.

However, excessive debt, prior foreclosures, and a low credit score can hamper the process. If any of this pertains to you, then pre-approval might take anywhere from several days to multiple months, depending on your financial situation’s complexity.

Accelerate your timeline by providing your mortgage professional with all the necessary documentation up front! Don’t forget these important documents or keep them hidden – be upfront and transparent.

Take the necessary steps to achieve your home-owning dreams! Get organized and financially equipped before taking your first step. A good real estate agent will point out that taking care of all of these preliminary steps is critical!

  1. Get pre-approved for a mortgage.
  2. Be mindful of what kind of house fits within your budget – know your numbers!
  3. Have a list of things you are looking for in a home.
  4. Discuss with your realtor your ideal community or neighbourhood.

You’ll be thankful for taking this proactive step in your home-buying journey!

Things to consider.

  • You’ve reviewed your monthly cash flow and prepared a budget. You’ve minimized the amount of debt you owe. You have saved for a downpayment and understand the financial responsibility of taking on a new mortgage, including all miscellaneous homeownership expenses.
  • What if disaster strikes? If you suddenly lose your primary source of income. You have at least 3–6 months worth of expenses saved up in an emergency fund. This will give you time to search for a new job safely? Think about it: buying a house is no small investment. Having the necessary financial cushion could make all the difference during uncertain times.
  • A minimum down payment of 5%, preferably 10% or more. While having just the minimum is acceptable, aiming higher with an optimal down payment of 20% is ideal. Not only does this make you look even more attractive as a borrower in the eyes of your lender, but also, by reaching that 20% mark, you’ll no longer be mandated to pay default mortgage insurance – which protects the lender if ever your house goes into foreclosure.

7. Does A Mortgage Pre-Approval Expire?

Absolutely! All mortgage pre-approval letters come with an expiration date. Many aspects of the mortgage process can alter after you receive your pre-approval, such as your income, credit history or even employment. Generally a pre-approval is valid for 90 to 120 days. You should update your pre-approval if it expires.

If your income or employment status has changed, you should immediately contact your mortgage professional to discuss options and next steps.

8. Does getting pre-approved commit you to anything?

Receiving a pre-approval does not tie you to the mortgage professional or lender who issued it. If you opt for a new mortgage agent or lender, be ready to begin the process all over again – from square one! You’ll have to provide all of your documents all over again. You’ll be starting from scratch!

On the other hand, when deciding to obtain your mortgage from the same mortgage professional who provided your initial pre-approval letter – they already have your documents on file. They can quickly submit those documents to a lender when you’ve found the house you’d like to purchase.

This makes closing on your new home much easier and faster than ever before.

9. Do Pre-Approvals hurt your credit score?

A mortgage pre-approval will have minimal impact on your credit score. Working with a mortgage broker, they pull your credit and can use it for multiple lenders. Saving you time from having to go to different lenders and have them each pull your credit reports. Where if you were to go from lender to lender and have multiple lenders pull your credit for the same purpose, it could adversely affect your credit score. It’s important to manage this aspect of a pre-approval effectively.

Conclusion

Getting a mortgage pre-approval is an important part of the home-buying process. Pre-approvals assure lenders and real estate agents that you’re financially ready to purchase a home. 

Being organized is important. Understanding your finances and having them in order before submitting them to a mortgage professional or lender. Doing so will ensure you know exactly what you can and cannot afford, give you a chance to negotiate confidently and make the entire home-buying process a smoother experience. 

A mortgage pre-approval will have minimal effect on your credit score. So it is a risk-free way to explore your options before committing to anything. Pre-approvals come with an expiration date, so keep that in mind and renew your pre-approval if needed.

Now that you know more about the mortgage pre-approval process, it’s time to start looking for the home of your dreams! Spring is around the corner. Call us if you have any questions. Let’s get you pre-approved the right way. Good luck!

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