Everything You Need to Know About Obtaining a Mortgage Pre-Approval
Getting pre-approved for a mortgage constitutes one of the first key steps of the home-buying process. It sets your borrowing limit, whether individually or as a couple.
In other words, it determines the maximum amount of money you can spend on a property.
Where to Go for a Mortgage Pre-Approval?
Certain lenders offer fast-tracked online pre-approvals, but these possess little value, according to Cynthia Laventure, financial security advisor and owner of the firm Mon choix financier. The reason is that the information you’ve provided hasn’t been properly analyzed and validated.
This is why you should, instead, pursue one of these two avenues to obtain a more reliable mortgage pre-approval.
1. Schedule an appointment with a financial institution or a mortgage professional.
2. Contact a mortgage broker. This professional will approach available lenders offering products that correspond to your needs on your behalf.
Remember that pre-approval amounts can vary between lenders.
Good to Know
You’re under no obligation to sign a mortgage contract with the lender or institution that issued your mortgage pre-approval when you purchase your property.
How Does the Bank Determine Your Borrowing Limit?
Banks take various factors into account, often termed the 6 C’s of credit:
- Credit score: Does the client have a low or excellent rating?
- Character: Does the client have a history of repaying their loans? Do they have a stable income?
- Capacity: How much money is available after deducting debts (car loan, student loans, etc.)? How large is the downpayment, and how much money is left for related expenses?
- Collateral: What type of property does the client wish to purchase? It simplifies matters if it’s in a large city or suburb. The client’s desire to buy an unconventional residence (a heritage home, for example) or one in a remote area can complicate the process. This matters because the bank evaluates how easy it would be to resell the property should the borrower default on their mortgage and lose their home. In short, the property’s type and location can impact how much the bank is willing to lend the client, and sometimes even the loan’s interest rate.
- Conditions: Market conditions are considered as well. Cynthia’s advice to her clients is to add a hypothetical 2% to the rate they receive to see if they could still pay their loan should interest rates rise.
- Confidence: The bank will also closely examine the client’s general profile. A competent professional will want to obtain a comprehensive picture of the client’s financial situation beyond their credit history and downpayment. This is why one institution may say yes and another, no.
Am I confident the client will repay their loan? Like if their entire family uses this bank and they have $500,000 in assets—that inspires confidence. It’s all part of the file!
Financial security advisor
Which Key Documents Must You Provide?
- Proof of income: In order to prove your income, you will need to submit certain documents. These include your latest T4, a recent payslip, a letter of employment proving that you’re a permanent employee, and your provincial and federal notices of assessment.
Good to Know
Some institutions also consider family allowances.
- Investment statements: Ideally, you should provide the most recent quarterly statement for each investment account (RRSP, TFSA, FHSA, open accounts as well as cash held in bank accounts).
- Proof of downpayment: This may be in the form of cash or money invested in a savings plan. “Send all your investment statements: there’s no downside for you as a borrower,” states Cynthia Laventure. Please note that proof of funds must be accompanied by a 90-day history showing the source of the money.
Why Get a Mortgage Pre-Approval
At the end of the pre-approval process, the institution will hand the client a letter confirming they’re pre-approved for amount X.
Having a mortgage pre-approval benefits the seller, the buyer, and the real estate broker:
- It allows buyers to focus their search on properties that fit their budget.
- It strengthens the buyer’s position, especially if they’re a first-time buyer. In a competitive market, this document carries weight! For example, between two purchase offers from couples interested in the same property, the seller will usually pick the pre-approved couple.
- Pre-approval helps reduce stress since the buyer has already put together a file attesting their purchasing power. There is no need to rush around assembling paperwork or proving your income! This is convenient because after a purchase offer has been accepted, the buyer generally only has 10 days to confirm their financing.
Does a Mortgage Pre-Approval Expire?
A mortgage pre-approval is generally valid for 90 days. Once it expires, it can easily be renewed, subject to a reassessment of your credit file.
There’s a strong likelihood that the renewal amount will be the same, unless the client has taken out a new loan in the meantime, for a car, for example.
It isn’t so much a large purchase that would cause a problem, but rather a new loan. In some cases, the pre-approval may no longer reflect the client’s financial situation. Changing jobs, for example, could affect whether their income qualifies for the pre-approval renewal process. In fact, banks will generally exclude any salary earned during a shorter than six months work period.
Financial security advisor
Obtaining a mortgage pre-approval is absolutely key before you even begin house hunting!
