Mortgage Pre-Approval in Canada: A Step-by-Step Guide

What is a mortgage pre-approval?

A mortgage pre-approval is a formal step in the mortgage process where a lender reviews your finances to estimate the maximum amount they may lend you and the interest rate they would offer. This involves a credit check and a detailed assessment of your income, debts, and assets.

It's important to understand that a pre-approval is not a guarantee of final mortgage approval. The lender will still need to verify the property you want to buy and may require an appraisal before granting the full mortgage.

1. Provides an estimate of the loan amount you qualify for
2. Includes a rate hold that protects you from interest rate increases for a set period
3. Involves a hard credit check, which may temporarily affect your credit score

Sources: Government of Canada, Wowa

Pre-approval vs. pre-qualification

Many borrowers confuse pre-approval with pre-qualification, but they are different stages. Pre-qualification is a quicker, less formal estimate of what you might borrow, typically based on information you provide. It usually involves a soft credit check, which does not affect your credit score, and it does not include a rate hold.

A pre-approval, on the other hand, is a more thorough review of your finances, including a hard credit check and verification of your income and debts. It results in a specific rate hold, which locks in an interest rate for a period, typically 60 to 130 days, depending on the lender.

When you are serious about buying a home and want to lock in a rate, a pre-approval is the more useful step. Pre-qualification can be a helpful starting point to gauge your budget, but it does not provide the same level of certainty.

Sources: Ratehub.ca, nesto.ca, Wowa

Documents you need

When you apply for a pre-approval, you'll need to provide documentation that verifies your financial situation. While the exact list can vary by lender, you can expect to provide the following:

Having these documents ready can speed up the pre-approval process.

• Proof of income (e.g., pay stubs, tax returns, or Notice of Assessment)
• Government-issued identification
• Proof of down payment (e.g., bank statements or gift letter)
• Details of your assets and debts, such as credit card statements or loan balances

Sources: nesto.ca, Wowa

How to compare pre-approval offers

Not all pre-approvals are the same. Here's what to look at when comparing offers from different lenders:

Remember that the rate hold period and the conditions attached to it can differ. Some lenders may allow you to take advantage of a lower rate if rates drop during the hold period, while others may not. Confirm the specifics with each lender.

• The interest rate offered and the length of the rate hold
• Any conditions attached to the rate hold (e.g., whether you can benefit from a rate decrease)
• The maximum mortgage amount you're approved for
• Whether there are any fees or costs, and confirm with the lender
• The lender's reputation and customer service

Sources: Ratehub.ca, Wowa

What to do after pre-approval

After you receive a pre-approval, you can start shopping for a home with confidence, knowing your budget and that your interest rate is protected for a certain period. However, keep in mind that your pre-approval is not a final approval. The lender will still need to approve the specific property you choose, and it may be reappraised.

Make sure you understand how long your pre-approval is valid. If you exceed that period, you may need to reapply or extend the rate hold. Also, avoid making major financial changes, like taking on new debt or changing jobs, as this could affect your final approval.

Sources: Government of Canada, Ratehub.ca, Wowa

Common pre-approval mistakes

Here are some pitfalls to avoid when getting a pre-approval:

By avoiding these mistakes, you can use your pre-approval effectively.

• Treating the pre-approval as a guarantee of final approval—it's a preliminary step, not a promise.
• Failing to compare offers from multiple lenders—rates and terms can vary.
• Not understanding the rate hold period—if you take too long to buy, the rate may no longer be valid.
• Making major financial changes after pre-approval, which could lead to the lender reassessing your application.
• Assuming the pre-approval locks in your down payment amount—it's based on your financial picture at the time, which can change.

Sources: Government of Canada, Wowa