Mortgage Pre-Approval Guide 2021

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If you're looking to get a mortgage and buy a home anytime soon, you should look into getting a mortgage pre-approval. With a mortgage pre-approval, you can lock-in an interest rate for up to 120 days and have a credible estimate of your mortgage limit that you can show to agents and home sellers as proof that you are a serious buyer. The procedure is similar to applying for a mortgage, and while it can take some time, it can save you the hassle of having to apply for a mortgage when you're busy trying to close on your new home.

What You Should Know

  • A mortgage pre-approval is an estimate that a lender makes on how much you can borrow and can give you a locked-in interest rate
  • Your locked-in rate and pre-approval will be valid only for a certain period of time, usually from 60 days to 120 days
  • You'll need to provide documents just like you would when applying for a mortgage: your bank statements, proof of income and employment, and a credit check
  • A mortgage pre-approval letter can be helpful when making offers on homes, as it shows the seller that you may already have financing in place
  • A mortgage pre-approval isn’t a guarantee that the lender will give you a mortgage
  • You’re not obligated to get a mortgage from the lender that gave you a pre-approval, and you can always continue to negotiate the interest rate even if it was locked-in

Mortgage Pre-Approval Basics

What is a mortgage pre-approval?

A mortgage pre-approval is a written contract with a mortgage lender that lets you lock in a certain term and interest rate and gives you an estimate of your mortgage limit. While it does not guarantee that you will be able to borrow the entire mortgage amount, it is usually a reasonable estimate and can help guide you in your home buying process. Some home sellers also request a mortgage pre-approval to make sure that buyers can afford their homes and won’t have to drop-out later due to financing problems.

A mortgage pre-approval does not last forever, however. You will usually have 60 to 120 days to close on a home purchase and sign a mortgage agreement at the locked-in interest rate. If you take longer than the agreed amount of time, you may get a different interest rate.

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Mortgage pre-qualification vs. pre-approval

A mortgage pre-qualification is a quick and simple way to get a rough estimate of your potential mortgage affordability based on your income, but a mortgage pre-approval has much more value as it’s backed by a written contract and is based on a more thorough analysis of your financial situation. You can get a mortgage pre-qualification over the phone or online with only a few details about your financial situation, which makes it a convenient option when you’re still early in the home buying process. However, if your financial situation is complex or you need a more accurate estimate, a mortgage pre-approval can give you a much higher level of assurance with a written contract and more in-depth analysis of your personal financial situation by your lender.

When putting an offer for a home, only a mortgage pre-approval will show the seller that you’re a serious buyer and have a very high chance of getting a mortgage.

Benefits of a mortgage pre-approval

Although a mortgage pre-approval is optional, it has many benefits for home buyers including:

  • Know your mortgage affordability. You will know how much you can spend and reduce the risk of making an offer for a home you cannot afford.
  • Mortgage financial planning. You can estimate your monthly mortgage payment and plan your finances ahead of time.
  • Locked-in interest rate. Depending on the lender, you may be able to lock in an interest rate for 60 to 120 days.
  • Show that you are a serious buyer. You can show sellers and real estate service providers that you are a serious buyer. This can increase your negotiating power and make your offer more attractive than an offer with conditional financing from a buyer who is not sure if they can get the money to buy the property.
  • Free and there are no obligations. There is usually no cost and it is your choice whether or not to use the mortgage pre-approval.

How can a mortgage pre-approval affect conditional offers?

It is common for buyers to put down a conditional offer for a home where certain conditions will have to be met before the actual agreement is finalized; if one of the conditions is not met, the agreement will fall through and any deposit is returned to the buyer. The most common conditions include a clean home inspection, sale of the buyer’s current home, and financing. A buyer without a financing condition can stand out against other offers, but if the buyer ends up not being able to finance the purchase, the seller will keep your deposit and can sue you for damages associated with the termination of the offer. You may have to pay for any differences in price if the seller has to sell for a lower amount than your initial offer! Having a mortgage pre-approval can give you the confidence to waive the financing condition, but remember that mortgage pre-approvals are not guaranteed and you should make sure not to exceed your maximum limit.

How to Get a Mortgage Pre-Approval

You can get a mortgage pre-approval from a mortgage broker or directly from most lenders. You will likely have to provide detailed information about your financial situation and verify your income. Documents needed could include bank statements, a verification of employment, your credit report, and your previous tax assessment. Think of it like applying for a mortgage - in order for your lender to give you an accurate estimate, they will need to know whether you can handle the expenses of a mortgage.

What do I need to do to get mortgage pre-approval?

You will need to have a valid proof of income, assets, employment, and other documents the lender may require. This can include bank statements and your latest tax assessment. Your credit score also plays a significant role in determining your eligibility. If you do not have a good credit score, lenders can refuse to approve your mortgage—the required credit score for a mortgage approval ranges between 300 to 900, but the minimum credit score required by most major banks in Canada is 600 to 700.

How is my credit score determined?

Your credit score is based on many factors that play into how risky a borrower you could potentially be. If you have a history of paying your bills and debts on time, your credit score will slowly move up. If you miss a bill or payment, your credit score can drop significantly. Another factor that can temporarily affect your credit score is a “hard credit check”, which happens when you apply for a loan or line of credit. Lenders are wary of borrowers that suddenly try to borrow money from many different lenders. While the effect will only be temporary, you should try not to apply for a loan prior to getting your mortgage or pre-approval. This can include an auto loan, personal loan, or line of credit such as a credit card.

Some people may not have a credit score or have a low credit score despite paying all their bills on time because they haven’t borrowed much in the past. This means that lenders have less information to base their decisions on, which makes you a more risky borrower.

As a Canadian, you are entitled to one free annual credit report from each of the major credit reporters in Canada: TransUnion and Equifax. Some financial institutions also offer free credit scores and credit monitoring services as part of their product packages.

What will affect my mortgage pre-approval?

A mortgage pre-approval isn't just a simple yes or no, as you'll also be evaluated to see how much you can borrow and the mortgage rate that you will be pre-approved for. Factors that your lender will look at when evaluating your pre-approval include:

  • Your Income. Your lender will check your income to see how large of a mortgage you will be able to afford. The higher your income, the larger the mortgage payments that you can afford to make. However, your lender won’t look at your income on its own. Your existing debt, combined with your potential mortgage, will be considered when calculating your debt service ratios. If your debt service ratios are too high, which can happen if your income is too low or your debts are too high, then it will be more difficult to be pre-approved.
  • Your Assets and Debts. Your lender will ask for your total assets and debt to calculate your net worth. For assets, this can include your bank account balances, investments, and property. For your debts, this can include credit card balances, mortgages, personal loans, and student loans. Your total assets subtracted by your total debt will give you your net worth. Having a negative net worth can make it difficult to be pre-approved for a mortgage.
  • Your Credit Score. You’ll need to have at least the minimum credit score required by your lender, which can also depend on whether you want to get an insured or uninsured mortgage. If you require an insured mortgage, such as if you plan on making a down payment of less than 20%, then CMHC mortgage rules require a minimum credit score of 600. This can be higher than the minimum that your lender requires, such as if you’re getting a mortgage pre-approval from a B-lender or monoline lender.
    Besides your credit score, your lender will also look at your credit history. This information comes from your credit report and shows how long you have had credit for. If you have a good credit score, but you have a very short credit history, then it can negatively impact your chances of pre-approval. Negative events, such as consumer proposals, missed payments, or bankruptcy, can also stay on your credit report for years and impact your chances. The longer your credit history, the more confidence your lender will have, as you will have a proven track record that your lender can make a decision from.
  • Employment History. Lenders want to know that you will have a stable source of income to pay your mortgage payments. Your lender might ask to see proof of employment, which can include pay stubs or tax returns. If you’re self-employed, lenders may want to see two to three years of self-employment income history.
  • Down Payment. You won’t need to make a down payment for a mortgage pre-approval, but you will need to show proof that you will be able to make a sufficient down payment. This can include providing a bank statement that shows that you have enough saved up in your bank account. The source of your down payment is important too. Non-traditional sources of down payment, such as gifts or borrowed from a loan, can impact your pre-approval.

When should I get mortgage pre-approval?

It is a good idea to get pre-approved before house-hunting. Knowing how much you are eligible for can help you plan for financing, set a budget and narrow down your search and expectations for a home since you know how much you can afford.

What A Mortgage Pre-Approval Letter Looks Like

Once you have been pre-approved for a mortgage, you will receive a pre-approval letter or certificate. You can then use your pre-approval letter as proof to sellers that you will be able to afford the home purchase or use the pre-approval amount to help guide you on your home search. Your pre-approval letter will include information such as:

  • Your preapproved mortgage amount: This is the maximum amount that the lender is willing to let you borrow.
  • Home price: This is the maximum price of a home that you can afford to buy based on your down payment.
  • Mortgage interest rate: This mortgage rate is locked in for a period of time. If you apply and are approved for a mortgage within this period, you are guaranteed to have this rate, even if market rates have increased.
  • Expiry date: Mortgage pre-approvals usually have a rate lock that expires in a certain period of time, from 60 days to 120 days. After this date, your mortgage rate is no longer guaranteed.
  • Mortgage type: Your letter will show what mortgage terms your pre-approval was based on, such as the amortization, mortgage term, and LTV ratio. Your pre-approval letter may also specify your down payment and monthly mortgage payment amount.

Canadian Bank Mortgage Pre-Approvals

RBC Royal Bank

RBC Royal Bank Mortgage Pre-Approval

RBC offers both mortgage pre-qualification and pre-approval. The former is quick and convenient: done through the phone or online, you are required to provide financial information such as income and debt. The lender will then give an estimate of how much they are willing to lend with no obligation.

With a mortgage pre-approval, the lender will actually verify your credit and information; although the actual rate or mortgage may differ if you do decide to accept, the lender is obligated to lend to you if you do get pre-approved and meet the conditions. You can apply for an RBC mortgage pre-approval by filling out their online application form. An RBC mortgage specialist will then take over the rest of the process and let you know what documentation you will need to provide. Typically, if pre-approved you will be able to lock-in a mortgage rate for 120 days.

Scotiabank

Scotiabank Mortgage Pre-Approval

Scotiabank offers their mortgage pre-approval service online through Scotiabank eHome, a digital platform that takes care of all of your needs and applications regarding mortgage. You are prompted to complete the pre-approval application in 5 steps in which it asks for information on records such as employment history and assets. Once you submit your application, if you are eligible for the pre-approval you will be able to download your pre-approval letter online that details your exclusive rate guarantee.

Scotiabank’s platform is extremely simple and easy to use: you are able to save your application and complete it whenever you want, contact a mortgage specialist if help is needed, and your status is provided in real-time.

TD Bank

TD Bank Mortgage Pre-Approval

You can apply for a TD mortgage pre-approval online, through phone, or in-person. You will be asked to provide documentation such as your address, employment information, and value of assets. If applying online, you will receive a mortgage pre-approval certificate if your application is approved after review. You can also set up an in-branch meeting and your provider will let you know what documents to bring.

TD has a 120-day rate hold which allows you to hold your offered interest rate for the next 120 days if all conditions are met, even if their marketed rate on the term increases. If the interest rate decreases and is lower than what they provided in the pre-approval, you can ask to have your given rate adjusted to match. When you submit your application online, there is no impact on your credit score. If you are new to Canada and became or have applied to be a permanent resident with less than 5 years of residency in Canada, TD will allow you to apply for a mortgage and a pre-approval even if you have no credit history.

CIBC

CIBC Mortgage Pre-Approval

You are required to book an appointment with CIBC to be able to receive a mortgage pre-approval certificate. You will be asked to provide details of the property, employment and income verification, confirmation of down-payment, and personal financial information. If you are eligible, you will receive a mortgage pre-approval certificate that outlines your terms.

You will be able to lock in the interest rate offered in the certificate to up to 120 days from the certificate date if you meet the stated conditions. However, keep in mind that changes to your credit history such as paying off a major loan could impact the mortgage amount you can afford.

BMO Bank of Montreal

BMO Bank of Montreal Mortgage Pre-Approval

You can apply for a BMO mortgage pre-approval online, in-person at a local branch, or through a mobile mortgage specialist. You will be asked to provide information on your liabilities, assets, valid ID, and employment. Your application will be reviewed and results are typically released to you in one to two days.

BMO locks your offered interest-rate and term for up to 130 days given that you meet the provided conditions. You are also allowed to get pre-approval from multiple lenders although each pre-approval may affect your credit score. If you are new to Canada, you may be able to apply depending on where you have lived, financial information, and how long you have stayed but you must visit your local branch or contact a mortgage specialist to confirm.

Mortgage Pre-Approval Frequently Asked Questions

Does the interest rate depend on the length of mortgage pre-approval?

Yes. The length of time your offered interest rate is locked-in for after pre-approval plays a role in determining your interest rate. The longer the time, the more risky it is for the lender as they still have to offer you the lower rate even if their other rates increase. However, this is not the main factor that determines your interest rate: other important factors include your credit score, whether your documents are complete, and your financial situation. In general, if a lender deems you to be a risky borrower who may lack the ability to pay them back, your interest rate will be higher.

What should I do after getting my mortgage pre-approved?

If you get your mortgage pre-approved, congratulations! Look over your conditions carefully and take note of how long your interest rate is locked in so that if you choose to exercise your offer, you will meet all the requirements to do so. Once you find your dream home, do not forget that you will still need to apply for the actual mortgage and get ready to provide needed documents and applications. Your credit scores and documents will still need to be checked to see if you meet the pre-approval conditions—if there have been major changes, your rates and terms may change.

Should I negotiate the final mortgage rate?

If a lender agrees to loan you a mortgage, you are allowed to negotiate the terms and conditions which include the interest rate along with the amount and the term. You are more likely to be able to negotiate the rate if you have an excellent application that consists of a great credit score, a bigger down-payment, lower monthly debt, or other things that may appeal to the lender. Many mortgage brokers are willing to buy-down the rate that they get from their lenders, giving you a discount on your interest rate. We suggest that you take the time to shop for rates offered by different lenders and decide what is best for you. Remember, the interest rate isn't everything; the other terms and conditions in a mortgage can make a big difference as well.

Can you be denied a mortgage after pre-approval?

Being pre-approved for a mortgage doesn’t guarantee that your mortgage will ultimately be approved. This might be because your financial situation has changed, such as your credit, income, or employment history. There might even be an issue with the property itself, such as a home appraisal that falls short of your purchase price. If you've been denied a mortgage, you may want to try making a larger down payment, having a co-signer for your mortgage, or even using alternative mortgage lenders with less stringent requirements.

Do I need a mortgage pre-approval for a pre-construction condo?

If you’re looking to purchase a pre-construction condo, your builder will most likely ask that you obtain a mortgage pre-approval as a condition of your purchase agreement. Depending on your agreement, the builder might not ask for a mortgage pre-approval right away, but they may still have the right to ask for one at any time. If you’re unable to get pre-approved for a mortgage, then your purchase can be canceled.

It’s a good idea to get a mortgage pre-approval during the 10-day cooling period after signing your pre-construction condo purchase agreement. That way you can cancel your purchase without penalties if you’re unable to be pre-approved for a mortgage. While your occupancy and closing date might still be far away, a mortgage pre-approval is required by condo builders so that they have some assurance that you will be able to follow through with the purchase of your condo unit. However, the mortgage rate offered in your pre-approval may differ from your actual mortgage rate if the closing date is still years away.

Do mortgage pre-approvals affect your credit score?

Yes, mortgage pre-approvals will affect your credit score. When you submit an application to be pre-approved for a mortgage, your lender will check your credit report. This check counts as a hard inquiry, or a hard “pull”, that acts as a signal that you’re looking to apply for credit. Hard inquiries will negatively impact your credit score. The more inquiries you make for different loan types, the lower your credit score will go. Inquiries will stay on your credit report for up to 3 years.

If you're planning on shopping around and applying for multiple mortgage pre-approvals from different lenders, all inquiries associated with these applications will be treated as a single hard inquiry if they're all made within 45 days of your first inquiry. This can help avoid any large negative impacts on your credit score. Even so, most home buyers will only need one mortgage pre-approval. Having multiple pre-approvals might not be as helpful as shopping around for an actual mortgage.

Do mortgage pre-approvals cost money?

Mortgage pre-approvals are free. Even if a mortgage lender pre-approves you for a mortgage, you are not obligated to apply for a mortgage with them when it is time to purchase.

Do I need to pass the mortgage stress test for a mortgage pre-approval?

If your lender requires you to pass a mortgage stress test to qualify for a mortgage, then you will also need to pass the stress test to be pre-approved for a mortgage. Federally regulated lenders, such as banks, require you to pass the stress test, even for a mortgage pre-approval. You can use a stress test calculator as a rough guide to see if you can be pre-approved for a mortgage.

Should I tell my real estate agent how much I am pre-approved for?

To help tailor your home search, your real estate agent will ask for your price range and may even ask to see your pre-approval letter. You can let your real estate agent know the maximum amount that you have been approved for, but it is more important to let your agent know the maximum home price that you’re willing to look at. Just because you have been pre-approved for a large number doesn’t mean that you need to purchase a home for that amount. While your agent might want to know your price range, you also do not need to let them know your income or how much money you have.

Can I offer more than my pre-approval amount when buying a house?

Yes, you may choose to make an offer that is more than what you were pre-approved for. If your offer is accepted and you go ahead with the purchase, you'll need to find a way to finance your mortgage. If your offer is significantly more than your loan pre-approval amount, then you may need to make a larger down payment. If the difference is small, you may be approved for a larger mortgage when it comes time to apply for an actual mortgage.

Do mortgage pre-approvals expire?

Mortgage preapprovals do expire and only last for a certain period of time. That's because you are being pre-approved based on your financial situation at the time of pre-approval. Your finances might change over the next few months, which is why your lender might not want to be held to a pre-approval for longer. Mortgage pre-approvals also usually have a mortgage interest rate that is guaranteed. Your lender won’t be able to guarantee this rate forever, which is why there is an expiry date. If your mortgage pre-approval expires, you are free to get another one.

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