Mortgage Pre-Approval: An Essential Step Towards Easier Home-Buying

Posted On September 18, 2024

Canada’s mortgages face renewed hope, thanks to recent developments in the economy as well as a couple of government policies. Statistics Canada reports that inflation has slowed down, with the Consumer Price Index (CPI) dropping to 2% in August 2024.

The lowest it has been since February 2021, this is what the Bank of Canada (BoC) hoped for, with its triple rate cuts. It is further believed that this drop in inflation could lead to more interest rate cuts, which would help the housing market stabilize and woo buyers back.

In addition to the inflation drop, there are two new initiatives by the Federal Government that are aimed at making home-buying more affordable.

One, the price cap for insured mortgages will be raised from the present $1 million to $1.5 million by the end of this year. Two, 30-year mortgage options are being expanded.

What does this mean for the Canadian homebuyer?

This means that new mortgages will have more affordable interest rates and with the increased price cap, more people will be able to qualify. It also means that making monthly payments will be easier for first-time buyers and those purchasing new homes.

As we step into the Fall season, traditionally a well-performing period in real estate, these developments offer an optimistic outlook for buyers and the real estate market.

Talking about mortgages, one of the essential steps to settling down in your new home is to get pre-approved for one. A mortgage pre-approval marks you as a serious contender in the game of buyers vs. sellers. Whether you’re a first-time homebuyer or someone looking to upgrade, securing a mortgage pre-approval helps you understand your buying power.

This blog walks you through the process of mortgage pre-approval, why it’s important, the steps involved, and some FAQs to give you a well-rounded understanding of this crucial step towards homeownership.

What is Mortgage Pre-Approval?

You can probably guess from the name but bear with us as we explain.

A mortgage pre-approval is an agreement from a lender that details how big a loan they are willing to offer you. A pre-approved mortgage helps you navigate the real estate market with confidence.

This document specifies the interest rate and terms you can expect, giving you a firm idea of your purchasing extent. This is not a fail-safe guarantee of final mortgage approval, though.

During the pre-approval process, your financial situation will be thoroughly assessed, including your income, credit score, assets, and liabilities. Based on these factors and of course, the market conditions, the lender gives you an estimate of the maximum loan amount they’re willing to offer.

Is this the same as being pre-qualified for a mortgage?

No, there is a difference between pre-qualification and pre-approval. Pre-qualification is an informal process where you share some financial information with a lender, who gives you an estimate of how much you might be able to borrow.

On the other hand, pre-approval takes an in-depth look into your finances and is a written contract, which holds considerably more weight with sellers and real estate agents.

Why Get a Mortgage Pre-Approval

A mortgage pre-approval is a vital step in the home-buying process primarily because it offers several key advantages:

Lock-in Interest Rate: A pre-approval locks in an interest rate for a specified period, usually between 60 and 130 days. This protects you from market fluctuations – one less thing to worry about as you search for your home.

Set Your Budget: A pre-approval gives you a clear number for your borrowing worth. This sets a realistic budget limit for your home search, avoiding the consequences of choosing a property outside your price range.

Gain an Edge in Negotiations: Sellers prefer pre-approved mortgages because it indicates that the buyers are serious and financially capable of purchasing their house. This gives you an upper hand during negotiations, particularly in competitive housing markets.

Getting pre-approved for a mortgage helps ensure no unpleasant surprises or delays when you have settled on your new purchase. The lender will have already vetted your financial situation, so the final approval process is typically smoother and quicker.

Getting Pre-Approved for a Mortgage

The process is similar to applying for a mortgage but with fewer steps. Here’s the typical routine:

Find a Lender: Shop around for lenders to find the best rates and terms. And then, narrow down a few lender choices – you can get pre-approved either through a bank, credit union, or mortgage broker.

Submit Documents: You will be asked to provide detailed information about your income, assets, debts, and credit history. Usually, these documents are required:

• Proof of income (pay slips, tax returns, employment verification)
• Bank statements
• Details of any debts (student loans, car loans, credit card debt)
• Credit score

Credit Score Check: The next step is a check of your credit score to assess your financial history. A credit score of 600-700 is required for mortgage approval, though there are ways and means of getting approved even with a lower credit score.

Review Terms: Once they finish their internal processes, you will be given a pre-approval letter that outlines the loan amount, interest rate, and conditions of the mortgage. This letter can be shown to sellers as proof that you’re a serious buyer.

What Influences Your Pre-Approval

In addition to your finances, other factors can also influence the pre-approval process.

When we say finances, this includes your income, assets, loans and your credit score.

The higher and more stable your income, the larger the loan you can qualify for. You will be a clear frontrunner if you can prove that you have enough assets, including savings, for a hefty down payment as well as other costs associated with buying a home, like closing costs and moving expenses. Steady employment, preferably in the same organization or the same field for at least the previous couple of years, is an advantage.

On the other hand, if you have a mediocre credit score or high debts, your pre-approval limit may be lower. The terms of the mortgage may not be in your favour, as the lender will always try to hedge the risk of defaulters. If you’ve recently changed jobs or are in a probationary period or simply not working at all, it can be a red flag.

Why Mortgage Pre-Approvals Get Denied

Sometimes, even after you get a pre-approved mortgage, your final mortgage could be denied. It may not be something that you did but be aware of what can trigger this.

Changing jobs, especially if you’re in a probationary period, can be construed negatively.

Taking out a new loan or increasing the balance on your credit card will impact your debt-to-income ratio. Similarly, a drop in your Credit Score due to missed payments or new debts can make you ineligible for the mortgage you were pre-approved for.

But, sometimes, the pre-approval may be denied if the property you want to buy is appraised for less than the purchase price.

Or, based on market conditions, the lenders may change their qualifying criteria, such as increasing the minimum down payment or adjusting debt-to-income ratios.

What happens if I’m denied after being pre-approved?

Well, if it is due to a change in your financial situation, contact the lender directly. They will help identify the cause and work on improving the specific factors that led to the denial, such as paying down debt or improving your credit score.

Consult a mortgage broker if the denial was due to a change in eligibility criteria or the property appraisal. They can help you get a mortgage that suits you.

Fact Bytes About Mortgage Pre-Approval

1. How long does a mortgage pre-approval last?

A mortgage pre-approval is typically valid for 60 to 130 days, depending on the lender. If you don’t finalize your home purchase within this period, you may need to reapply and lock in a new interest rate.

2. What’s the difference between pre-qualification and pre-approval?

Pre-qualification is an estimate based on basic financial information, while pre-approval is a formal process that involves a thorough review of your finances and results in a written offer from a lender.

3. Can I get pre-approved for a mortgage with bad credit?

It’s possible to get pre-approved with less-than-perfect credit scores, but your loan options will be limited, and you might have to pay a higher interest rate.

Some lenders do give loans to people with poor credit, but improving your credit score can increase your chances of better terms.

4. What documents are required for mortgage pre-approval?

Typically, proof of income, bank statements, details of your debts, and employment verification. Lenders may also request your credit score and previous tax assessments.

5. Can I switch lenders after being pre-approved?

Yes, you can switch lenders after being pre-approved, but keep the new lender informed about your pre-approval status. Also, be mindful that your interest rate or loan terms may change if you switch lenders.

Take the First Step

Getting a pre-approved mortgage is an essential step in the home-buying process. Not only does it help set a realistic budget, but it also proves you’re a serious buyer, giving you a competitive edge in the market. While the process may seem unnecessary, it’s worth taking the time to gather your financial information and explore your options.

By understanding how pre-approvals work, you’ll be better prepared to navigate the journey and one step closer to owning your dream home.

And once you are successfully pre-approved, let Save Max help you find the perfect property. A detached home in Windsor, a Brampton condo or a semi-detached house in Mississauga – we have thousands of properties across Canada and ensure you get the right home.