A mortgage pre-approval is usually the first real step in buying a home. It tells you roughly how much a lender would lend you, it can lock in an interest rate while you shop, and it shows sellers you’re a serious buyer. But it is not a promise of a mortgage, and the amount is not a budget.
What a pre-approval is
A lender or mortgage broker reviews your income, debts, savings and (usually) your credit report, and tells you the maximum mortgage you could qualify for, an estimated payment and the rate they’d offer. Lenders use different names for this step, such as pre-qualification or pre-authorization, and they don’t all check the same things at this stage. Ask whether your documents were actually verified, because a pre-approval based only on what you told the lender is much weaker.
The maximum comes from the same rules every lender must use: your payment is calculated at the stress-test rate (the greater of your rate + 2% or 5.25%), and your housing costs and debts must fit within the GDS and TDS limits. See how much income you need for a mortgage for the details.
Documents you’ll need
- Identification, such as a driver’s licence or passport.
- Proof of employment and income: a recent pay stub, your position and how long you’ve worked there (often in an employment letter). If you’re self-employed, your Canada Revenue Agency notices of assessment for the past two years.
- Proof of your down payment and closing costs: recent bank or investment statements. Lenders typically want to see where the money came from, so gifts need a gift letter.
- Other assets, such as a car or cottage.
- Debts and obligations: credit cards, car loans, lines of credit, student loans, and child or spousal support.
Having these ready speeds things up and makes the pre-approval more reliable.
Rate holds
Most lenders hold the pre-approved rate for a period, typically 90 to 120 days; across lenders, the Financial Consumer Agency of Canada (FCAC) puts the range at 60 to 130 days. If rates rise while you shop, you keep the held rate if you buy within the period. Questions to ask:
- How long is the rate guaranteed?
- If rates fall during the hold, will I automatically get the lower rate?
- Can the pre-approval be extended if I haven’t found a home?
The credit check
A full pre-approval usually includes a credit check. That is a “hard” inquiry, which can lower your credit score slightly. FCAC advises getting mortgage quotes from different lenders within a two-week period, because credit bureaus treat those inquiries as one. Checking your own credit report doesn’t affect your score, so review it for errors before you apply.
Between pre-approval and closing, avoid anything that changes your credit picture: new car loans, new credit cards, large purchases on credit, or a job change. The lender may check again before the final approval.
Pre-approval vs final approval
A pre-approval is about you. Final approval is about you and the property. Once you have an accepted offer, the lender:
- checks the property meets its standards, which may include an appraisal to confirm the value;
- confirms your down payment and documents are as you described;
- arranges mortgage insurance if you’re putting down less than 20%.
Even with a pre-approval, a lender can turn down the mortgage, or offer a smaller mortgage, a higher rate, or ask for a bigger down payment or a co-signer. That’s why many buyers make offers conditional on financing; ask your real estate agent or lawyer how that works in your province and market.
Why your pre-approval isn’t what you can afford
A pre-approval is the most a lender will lend under its rules. Those rules use your gross income and only count certain costs. They ignore childcare, savings goals, car insurance, groceries, maintenance and the rest of your life.
Example. A couple earns $120,000 a year, pays $400 a month on a car loan, and is looking at homes with $4,500 a year in property tax and $125 a month heating. At a 4.49% five-year rate:
- They qualify at 6.49%, and the largest mortgage that fits is about $508,100, with a qualifying payment of $3,400.
- With $60,000 down, that points to a maximum price of about $552,700 including the mortgage insurance premium.
- Their actual payment on $508,100 at 4.49% would be about $2,809 a month. With property tax and heating, housing costs are about $3,309: a third of their gross income, and a much bigger share of their take-home pay.
- If they keep the mortgage to $400,000 instead, the payment is about $2,212, freeing up roughly $600 a month.
Use your pre-approval as a ceiling, then decide your own price from a budget based on take-home pay. The affordability calculator shows both the lender’s maximum and the payment, and the stress test calculator shows how close you are to the limits. Remember to set aside money for closing costs too.
Sources: FCAC, getting preapproved for a mortgage; FCAC, improving your credit score; OSFI, minimum qualifying rate. Payments calculated with this site’s mortgage engine.