Before you even begin visiting properties, you must obtain a mortgage pre-approval. This process may seem complex, but it’s indispensable for narrowing down your search criteria and for reassuring sellers.
Financial institutions typically offer far larger loans than what the borrower realistically needs. This is why carefully examining your priorities and financial circumstances before determining how much you can borrow is so essential.
Borrowing Capacity vs. Borrowing Limit: What’s the Difference?
- The borrowing limit corresponds to the amount the bank agrees to lend you.
- The borrowing capacity, on the other hand, depends on your financial situation, including your goals and lifestyle.
Why Do Financial Institutions Grant Such High Loans?
As Cynthia Laventure, financial security advisor and owner of the firm Mon choix financier, points out, the bank doesn’t do so in bad faith. It’s a financial institution’s job to give you a feasible borrowing limit, which holds provided this is your only major project. It can’t decide for you if additional life goals may prevent you from shouldering this loan.
So, as a buyer, you need to consider your own priorities. Are you comfortable repaying a mortgage that doesn’t leave enough space in the budget to enjoy many leisure activities or travel?
Only you know, but it might be wise to borrow less if you don’t want to sacrifice other projects that are important to you.
Are All Mortgage Pre-Approvals Equal?
The answer is no. In fact, two types of mortgage pre-approval are available to buyers. And while the terminology varies between lenders, the first is generally called a “quick pre-qualification” and the second a “full pre-approval.”
In reality, buyers should always opt for a full mortgage pre-approval. Here’s why:
1 - Quick pre-qualifications aren’t based on in-depth financial assessments and so offer little value.
This often consists of a preliminary discussion during which the financial institution provides a rough estimate of the potential loan, sometimes without analyzing all of the documents nor consulting the credit bureau. The amount only reflects the information supplied by the buyer.
In some cases, applicants fill out forms on their own online to get an idea of how much they could borrow. The information given and used isn’t verified.
In short, buyers should mainly consider the quick pre-qualification process as a tool to guide their deliberations.
In this document, the bank states that it’s willing to grant you financing, subject to various requirements. For example, final approval may depend on the buyer’s employment stability, including income (salaried or self-employed) and job security (probationary period, etc.). Thus, the conditions set out in this type of pre-approval are far from definitive.
2 – Only full pre-approvals are reliable and exact.
This level of pre-approval is conducted in a professional setting and involves a detailed analysis of your file and a real-world simulation.
The advisor at the bank will take your income, T4s, tax statements, and other financial documents into account when carrying out their analysis. This method’s thoroughness guarantees the amount’s accuracy.
What Differentiates a Quick Pre-Qualification from a Full Pre-Approval?
Because quick pre-qualifications rely on unverified information, the result may vary widely from that of a full pre-approval.
“You might be surprised,” notes Cynthia. “Sometimes, we think we have an excellent credit score and then, while checking during the full pre-approval process, there’s a hiccup.”
The issue might be, for example, an outstanding balance of $4 on an account that has been in arrears for several years, negatively affecting the credit file. Or a client has declared a yearly income of $100,000 in the quick pre-approval form, but the bank decides to exclude the $20,000 bonus, reducing the buyer’s borrowing capacity.
What Common Mistakes Should Be Avoided When Shopping for a Mortgage?
Once your mortgage has been pre-approved, it’s time to purchase a property. This is when you can start shopping around for a mortgage loan. According to our professional, the biggest mistake you can make during your search is focusing on rates rather than overall conditions.
Some companies offer to find you the best rate without considering the agreement’s other aspects. You may save 0.05% in interest, but you’ll sacrifice flexibility or customer service, or may even face additional hidden fees.
Financial security advisor
Flexibility constitutes a key feature of a mortgage loan. Your contract must allow for faster repayment to reduce interest, structural changes (e.g., switching from a traditional loan to a mortgage line of credit), payment schedule revisions, or refinancing for major renovations.
In some cases, the lender may impose fees for each requested modification or even refuse adjustments. This lack of flexibility can be both frustrating and costly for the borrower.
As Cynthia points out, having a professional by your side is essential: they will take your entire financial situation into account and can guide you through the decision-making process.
What About the Human Dimension?
A key advantage of partnering with a mortgage professional is their ability to present your application in a personalized manner to the specialists working at the approvals department as they often lack insight into the client behind it.
The professional’s role is to explain their client’s unique circumstances:
- They must clarify the client’s income.
- Describe the profile of the person concerned.
- Highlight the file’s most important elements.
- Outline any particular situations, such as the reasons for a drop in income during the last year compared to previous years.
This information may significantly influence how the file is analyzed.
One can’t overstate the importance of the human dimension in this type of transaction. Cynthia also affirms that she never sends a file to a lender if she knows it’s incomplete. She adds: “I don’t want to subject my client to needless rejection, as this can be emotionally difficult. When I know important details needed for lender approval are missing, I prefer to invest the necessary time with the client to fine-tune the application before submitting it.”
Have more questions? Contact a financial advisor who can guide you through the pre-approval process.
