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Mortgage Pre-Approval in Canada

Learn how to get pre-approved for a mortgage

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Written By Joel Kranc

Contributing writer

Updated

What is mortgage pre-approval?

The housing market in Canada has had its fair share of ups and downs of late. After an unprecedented run in the last decade, housing demand and prices have dropped due to high inflation rates and the resulting rise in interest rates.

Homebuyers who are still in the game are looking for an edge that can make that experience smooth, less competitive against other homebuyers, and with a modicum of stability that interest rates won’t rise before they are ready to take out a mortgage.

One way to achieve those goals is through a mortgage pre-approval. A mortgage pre-approval is a stamp of confidence by a lender that you qualify for a mortgage with supporting documentation and guarantees a term (as much as 130 days in some cases), an interest rate, and a principal amount. That amount can change upon closing if renegotiating is necessary or if you decide to go with another lender. While it does not guarantee that you will be able to borrow the entire mortgage amount, it can be a reasonable estimate, and can act as a leg up and guide in as you begin your homebuying journey.

Reasons why you should get pre-approved for a mortgage

Mortgage pre-approvals in Canada are not mandatory but offer some benefits to would-be homebuyers:

  • Mortgage preapprovals help homebuyers understand their affordability and budgets. Having the pre-approval can reduce the risk of you making an offer on a property that you otherwise could not afford.
  • You would be able to plan your monthly mortgage financing and borrowing costs ahead of time.
  • Depending on the lender, you can lock in rates for up to 130 days and renegotiate if rates come down. You are not bound by the pre-approval rate.
  • It’s free and there are no obligations behind having the pre-approval.
  • Having a pre-approved mortgage shows real estate agents and sellers you are serious about a home purchase.
  • It can help narrow your search for a home as you have a better understanding of borrowing constraints.

How to get pre-approved for a mortgage in Canada

Getting a pre-approved mortgage in Canada is not a guaranty and requires you to meet certain criteria. Among other things you will need certain documentation such as:

  • Proof of identity
  • Bank statements
  • Credit card statements
  • Lines of credit statements
  • Car loans
  • Other mortgage documents on other properties

Besides the administrative part of the process, certain criteria will need to be met as well:

Credit score – Lenders want to know their loans are as risk free as possible and will consider your credit score as a sign of your financial health. It's recommended you have a credit score in the mid-600s or higher when you apply for a mortgage pre-approval. If your score is below the mid 600s, lenders may not be able to approve your loan or may be required to offer you a higher interest rate, which can result in higher monthly payments.

Down payment – Different amounts for down payment can trigger different costs and interest rates for your pre-approval. For example, downpayments of:

  • 5% - 19.99%: Known as CMHC insured or ‘high ratio’ are the lowest rates because the CMHC assumes all risk and the lender has little/ no risk.
  • 20% - 24%: Avoids CMHC insurance and associated borrowing costs, but the rates are a bit higher. This is a bit of a toss-up for homebuyers as you are weighing higher rates but avoiding CMHC costs.
  • 25% +: Mortgage lenders have a very good comfort level with this amount and therefore offer lower rates (sometimes the lowest rates at this downpayment level)

Debt service ratio – Mortgage professionals use two main ratios to decide if borrowers can afford to buy a home: Gross Debt Service (GDS) and Total Debt Service (TDS), this calculator can help you determine either.

  • GDS is the percentage of your monthly household income that covers your housing costs. It must not exceed 39%.
  • TDS is the percentage of your monthly household income that covers your housing costs and any other debts. It must not exceed 44%.

Supporting documentation – Documentation for a mortgage pre-approval can vary depending on the lender you speak to. Items such as the following could be required:

  • Proof of income
  • Proof of employment
  • Identification
  • Proof of other assets or mortgages
  • Information about other debts

Knowing the limitation of a mortgage pre-approval

While a mortgage pre-approval is a great start to show your seriousness as a buyer, and to understand your budget constraints, there are reasons your pre-approval will not guarantee you a final mortgage approval.

Sometimes things change. For example, if your job or income has changed, and now doesn’t meet requirements by your lender, your mortgage application could be denied. Also, the home you make an offer on could have valuation problems or internal construction failures that would make it ineligible for an approved mortgage.

Also, with loss of income or job changes you might experience a change in your credit score, which could also change your application status. If anything changes between the pre-approval and the time of closing it is wise to talk to a mortgage broker or your lender to review your status.

Frequently asked questions about mortgage pre-approval

All you need to know about mortgage pre-approval and more. Read here...

How long does it take to get a mortgage pre-approval in Canada

It depends. But when it comes to getting a mortgage pre-approval, they can be done relatively fast, sometimes within 24hrs. However, this process can take up to 2-10 business days. Typically, you can expect to get a mortgage approval within 1-5 business days. This is why it's important to be prepared and start the pre-approval process early.

How far in advance should I get pre-approved for a mortgage when buying a home

Each homebuyer’s journey is unique with different timelines and/or deadlines. If you are at the beginning of your search and need the 130-day timeframe, then it’s best to take the time you need. If you have less time you can talk to your lender about the process and how quickly you can be pre-approved for a mortgage.

Does getting a mortgage pre-approval affect my credit score

Yes, mortgage pre-approval can affect your credit report, which acts as a signal, or so-called “hard inquiry” that you're looking to apply for credit. If your credit report is pulled more than three times in a six-month period, your score could be lowered.

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