Buying a home is one of the biggest financial decisions you can make. And it’s no surprise why, with most homes now having six to seven-figure price tags. In fact, CBC reported that the average price of a home sold in April 2023 was $716,000!
For most buyers, it’s rare to have that kind of money on hand to purchase a new home. That’s what makes mortgages so valuable. A home loan gives you the funds to buy a home upfront and pay off the principal and interest over time.
But how do you set your budget and start house-hunting if you don’t know the size of the mortgage you qualify for? This is where pre-approval for a mortgage makes all the difference. Having a clear idea of what kind of loan you are eligible for means you can focus on homes that fit within your budget.
Let’s take a closer look at what mortgage pre-approval is. Then, we’ll review how to get pre-approved for mortgages.
What Is a Mortgage Pre-Approval?
With a mortgage pre-approval, a lender examines your current financial position.
Based on detailed analysis, the lender estimates the maximum loan amount you can receive. The lending party also sets an interest rate. It’s important to note that being pre-approved for a mortgage allows you to lock in that interest rate for a period of time. (At Innovation, it’s 120 days.)
With these numbers in mind, you can target homes in a specific price range, making house hunting much easier.
Nevertheless, pre-approval is not a guarantee. The loan amount and terms may change under certain conditions. The most common reason for this is a significant change in your financial situation between the pre-approval and finalizing of your home purchase.
That said, if your finances remain stable, pre-approval can be invaluable in securing home ownership.
Why is Mortgage Pre-Approval Important?
Most financial processes are fixed. For example, bank customers or credit union members earn interest at a fixed rate. Mortgage terms are more personalized. They vary based on your credit score, current income level, and debt-to-income ratio.
Pre-approval offers an assessment of your creditworthiness without a binding commitment. It serves to ensure that your homeownership goals are aligned with your current financial situation.
Pre-approval also streamlines the selection of your future home. With a clear understanding of what loan amount you can expect from a lender, you can narrow down the list of options and focus on houses that fit your budget.
Benefits of Getting Your Mortgage Pre-Approved
Pre-approval accomplishes several key goals. First, it empowers you to compare offers from lenders, explains the Financial Consumer Agency of Canada (FCAC). It also provides a sense of how much you can afford by sharing a potential maximum mortgage limit.
Pre-approval offers more insight into your financial responsibilities as a homeowner as well. You can see the maximum amount you’re pre-approved for, along with the interest rate of your home loan. With these specifics, you can better plan your budget around monthly payments.
One last important benefit: a pre-approval demonstrates your commitment to finding a new home. That can make finding a real estate agent easier. It can also encourage a seller to take your offer seriously.
Where to Get a Mortgage Pre-Approved
Most financial institutions that provide home loans also offer mortgage pre-approval services. In Canada, you can get pre-approval from mortgage lenders or brokers. They will review your financial details and provide a pre-approval estimate for a mortgage based on your financial situation and the lender's criteria.
You will receive funds directly from your mortgage lender. The lender can be a bank, trust company, or a credit union like Innovation. Different lenders offer different interest rates and terms. Choosing the right lending party and a fitting mortgage option is crucial, as switching lenders after signing a contract could lead to transfer fees and penalties.
Unlike lenders, mortgage brokers don’t lend money directly to you. They find a lender and act as an intermediary for financial transactions. Brokers typically don’t charge fees for their services. They receive a commission from the lender after arranging the mortgage contract. However, a fee may apply in some cases, so it’s best to confirm with the broker directly.
Pre-approvals can be performed in person or online. To avoid undue delays, make sure you collect all the documents for pre-approval beforehand. The following section provides more details on what documents you’ll need to prepare.
How to Get a Pre-Approved Mortgage
How can you get pre-approved for a mortgage loan? It all starts with your lender reviewing key financial documents and personal information.
Every lender may have somewhat different requirements, even though the process and goals are similar for all pre-approvals. At Innovation, our mortgage specialists will work with you directly. They’re ready to answer questions, detail the specifics, and help you move through the process.
All you need to do is fill out the pre-approval form on our mortgage page!
Most mortgage lenders want to review similar information when making mortgage pre-approvals. The FCAC points out three main areas covered in pre-approvals:
Assets: money, property, and other things of value you own.
Debt: money you owe to others that you’ll need to pay back, whether now or in the future.
Income: your salary, returns on investment, and other sources of funds. This helps to demonstrate your continued ability to repay your home loan over time.
Lenders will need to confirm your identity and verify that you’re employed. They’ll also want to see that you can cover the parts of the home purchase that the mortgage won’t, specifically the down payment and closing costs.
For mortgage pre-approval, you’ll need to provide all or some of the following documentation to your mortgage advisor:
Identity and income verification
Bank statements
Recent pay stubs
Tax documents
Credit check
Debt statements and any court-ordered financial obligations (like child support)
Investment account statements
Have questions about pre-approvals? We’re here to guide you every step of the way to help you get the home of your dreams.
Start your mortgage pre-approval process today!
What to Do If Your Mortgage Pre-Approval is Refused
If your pre-approval is denied, it means the lender has decided not to lend you funds. While this can be quite disappointing, there are a few steps to consider.
Start by identifying and addressing the reasons for the denial. This might involve improving your credit score or reducing debt. Then, apply for mortgage pre-approval again or with another lender. Terms and conditions vary from one financial institution to another, so having a fresh look at your financial situation could mean all the difference.
You could also consider finding a co-signer with a stronger credit history, income level, and debt-to-income ratio. This could help you increase your chances for approval.
A third option is to explore an alternative mortgage like our Fresh Start Mortgage. It’s designed for people who have been turned down for a mortgage and might just be what you’re looking for - especially if you’re new to Canada.
Mortgage Pre-Approvals and Rate Locks
Upon successful pre-approval, lenders may lock in your interest rate for a set, relatively short period, often between 60 to 120 days, though this duration varies by lender. At Innovation, you can lock in your rate for 120 days.
A rate lock is the lender’s commitment to keep your mortgage rate steady for that timeframe. It means you won’t be affected if the interest rates go up. By locking in an approved rate, you won’t have to worry about potential market fluctuations. If rates fall, some lenders may allow a rate adjustment before finalizing the mortgage, but this depends on the lender's policy.
Pre-Qualification vs. Pre-Approval
Although sometimes mistakenly used as interchangeable terms, pre-qualification and pre-approval are two distinct processes that provide you with different levels of certainty in estimating your budget for a residential property.
Let’s Compare | Pre-Qualification | Pre-Approval |
Definitions | A preliminary step in evaluating the size of a mortgage you will be approved for. | A detailed review of your financial data leading to a personal quote similar to the final mortgage application. |
Time | Time-efficient. It can be performed via an online pre-qualification tool where you need to submit your current income, debt, and assets. | Takes more time. You’ll need to prepare and send a set of documents specified by your mortgage advisor (identity, income verification, bank statements, pay stub, tax documents, credit check, etc). |
Applicability | Gives you a preliminary estimate on the loan you are eligible for. This is a good first step in securing your home. | Gives you an in-depth consultation on the mortgage approval. This step provides more accurate estimates. You can also lock in the rate upon approval. |
Do you still need to apply for a mortgage after completing this step? | Yes. The next steps could be filing the approval application and potentially getting pre-approval from the lender. | Yes. Despite being a detailed estimate of your mortgage preparedness, pre-approval doesn’t substitute the actual agreement. |
Have more questions about mortgage pre-approvals? Contact us to get started today!