What is a Mortgage Pre-Approval?

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If you are in the market to buy a new home, you’ll want to know what is a mortgage pre-approval. Essentially you can find out the what interest rate and how much you’ll be approved for before you begin your home search

Mortgage pre-approval and mortgage pre-qualification are options that are offered by most lenders. They can help you better prepare and estimate just how much it will cost to be a home buyer. Here’s what you need to know about mortgage pre-approval in the homebuying process. 

What is a mortgage pre-approval?

A mortgage pre-approval is when a lender approves you for a mortgage for a short time before purchasing a home. A pre-approval is temporary but has the advantage of allowing you to know exactly how much you can afford while shopping for a home, what your interest rate will be, and an estimate of how much your mortgage payments will be. 

These rates are locked in for a predetermined amount of time which allows you to shop around and keep an eye on the market. If interest rates increase during your locked-in period, you are safe. But, if they decrease, you can negotiate a better rate when it comes time to close.

Keep in mind that some lenders will only offer fixed rates for mortgage pre-approvals. Variable rate mortgages cannot always be guaranteed because they are determined by the Bank of Canada’s policy rate.

Finally, a mortgage pre-approval is not a final guarantee. When it comes time to close, the lender will do a final check on your finances to ensure that nothing has changed in the time since the pre-approval was made. If there have been significant changes, such as changes to your income or down payment, they do have the right to turn you down.  

What is a mortgage pre-qualification? 

Sometimes the term pre-qualification gets tied in with pre-approval, but these are not the same things. Pre-qualification is a quick calculation that allows you to know how much you can qualify for. It will give you an idea of how much you can afford, but nothing is locked in. Think of those online mortgage calculators as a mortgage prequalification since they’re just a quick reference.

A pre-approval is a much more in-depth process where the lender will do a credit check with the two credit bureaus: Equifax or TransUnion (this counts as a hard inquiry). Lenders will also look into your financial information before you are approved as part of the underwriting process. Again, the pre-approval is just a promise of a home loan based on your financial situation at the time of seeking pre-approval, and your finances will be double-checked when it comes time to close.  

How long do mortgage pre-approvals last? 

How long mortgage pre-approvals last will depend on the lender. Typically, they are between 90 to 120 days. However, some can be as short as 60 days or as long as 160 days.  

Mortgage pre-approvals are set to allow you some time to shop around and find a home or property that you wish to buy. While they are a fairly generous time frame, they do not last forever. This is why it’s essential to only get pre-approved for your mortgage when you are seriously ready to shop and buy. 

Another thing to note is that if you are getting a home appraisal, it could affect your mortgage pre-approval. Even if you’ve been pre-approved for a mortgage of $800,000, but the home you’ve purchased is appraised at a lower value, your lender will likely reduce the amount they’re willing to extend you. That would require you to make up the difference.

Where to get a mortgage pre-approval 

Mortgage pre-approvals are offered by mortgage lenders or mortgage brokers. 

A mortgage lender is a business that lends money directly to you. Examples of mortgage lenders include:

  • Banks
  • Credit unions
  • Caisses populaires
  • Trust companies
  • Insurance companies
  • Mortgage companies
  • Loan companies

Remember that different lenders will have other conditions and likely different interest rates, even for similar products. It’s best to shop around and compare to ensure you get the best deal. 

Since shopping around can be time-consuming, you may be interested in hiring a mortgage broker. Mortgage brokers don’t lend the money directly to you but instead work on your behalf to find the best mortgage product for your needs. Brokers have access to several lenders which means they can compare various products. However, not all brokers have access to the same lenders.  

How to get pre-approved for a mortgage? 

If you want to get pre-approved for a mortgage, you will need to provide your personal and financial information to either the lender or the mortgage broker who is working with you.  

You will need to provide the following:

  • Identification (official documents such as driver’s license, passport, etc.)
  • Proof of employment (pay stubs including salary/hourly rate, position and length of time you’re your employer, or 2 years of notices of assessment for tax returns from the CRA if you are self-employed)
  • Proof of any additional gross monthly income (side hustles, part-time jobs)
  • Information about any assets (car, cottage, boat, etc.)
  • Information about any debts or financial obligations (credit card debt, car loans, spousal support, any other monthly debts)
  • Proof that you can afford the down payment and closing costs (you may be asked to provide bank statements) 

Before starting up this process, you want to ensure that you are in as good of financial standing as possible. They will check your credit report, so the better the credit history and credit score, the more likely you are to be easily approved. 

What to consider during the pre-approval process 

Being pre-approved for a mortgage loan can be incredibly helpful in knowing how much you can afford to spend. But remember that pre-approval is not a guarantee, and it is the maximum amount you will be approved for. This means you may want to look for a home with a lower purchase price so you don’t stretch your budget. After all, there are still several other costs related to buying a home, such as closing costs, moving costs, any home upgrades you want or need to do, other savings goals, and just the general ongoing maintenance costs that come with being a homeowner. 

What to do if a lender denies your mortgage application 

The unfortunate truth is that not everyone gets pre-approved for a mortgage. If this does happen to you, there are a few steps that you can take before you try again. 

  • Consider lowering your expectations – You might have reached too high for your financial situation, and if you shop for something in a lower price range, you will have a higher chance of being approved. 
  • Take some time to save up for a more significant down payment – Having more money for that means you don’t need to borrow as much from a lender. 
  • Work on improving your credit score – Having a poor credit score could be part of the reason you were denied a mortgage.
  • Pay off as much existing debt as possible – By lowering your debt, your income ratio to debt decreases. This is good for the preapproval process.
  • Check other lenders – Remember, every lender is different, and just because one doesn’t approve you doesn’t necessarily mean that they all will.  
  • Get a co-signer – If your income and credit score on your own isn’t enough, you can ask someone like a parent to co-sign. Keep in mind that the co-signer is responsible for your mortgage payments should you be unable to make them, so this is a huge ask and should be taken very seriously.
  • Stick with your job –  Job and income stability is something that lenders look at when considering your application.  

Questions to ask your lender or broker when getting pre-approved 

If you are ready to seek pre-approval for a mortgage, here are a few questions you should ask your lender or broker.  

  • How long is the pre-approval rate guaranteed for?
  • If interest rates decrease during your pre-approval period, will you automatically then be given the lower rate?
  • Can the pre-approval period be extended? (You might have more luck with this in a competitive housing market)

Additionally, this is the time to ask about anything you are unsure about or don’t understand. Buying a home and taking out a mortgage is a huge deal. As the borrower, you want to ensure that you fully understand the process before you commit. The lender, mortgage broker, and real estate agent are all there to help you through the process and answer your questions and concerns. 

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About Hannah Logan

Hannah Logan is a freelance writer based in Ottawa, Canada. She specializes in finance and travel writing and has bylines at Fodor's Travel, O Magazine, and more. She also runs two travel blogs, Eat Sleep Breathe Travel and Ireland Stole My Heart. You can find her on Instagram and Twitter @hannahlogan21.

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