How does the Canadian mortgage pre-approval process work?
A mortgage pre-approval is supposed to tell you how much you may be able to borrow before you start shopping for a home.
That sounds simple enough.
You fill out an application, someone checks your income and then you receive a number telling you what you can afford, right?
The answer is…sort of.
Although I cannot tell you exactly how every mortgage broker, bank or lender completes a pre-approval, I can let you peek behind the curtain and show you how the process works when someone comes to me.
It begins with something that has very little to do with calculating a maximum purchase price, but actually a conversation.
Step One: What Are You Actually Trying to Accomplish?
Most clients already have a general idea of what they want to do.
They might want to:
Purchase a home
Refinance their current mortgage
Transfer their mortgage to another lender for a better rate (at maturity, usually, but not always)
Port their existing mortgage to a new property
Consolidate debt
Purchase a rental property
But the type of transaction does not necessarily tell me what the client’s real goal is.
Someone purchasing a home might be trying to move closer to work, downsize after their children move out or find enough room to start a family.
Someone refinancing might want to pay off high-interest debt, complete a renovation or lower their monthly payments.
Someone transferring their mortgage might want a better interest rate, but they may also be worried about paying a large penalty, losing flexibility or locking themselves into the wrong mortgage for another five years.
That is why I usually begin with a phone call.
Email can work, but a conversation allows clients to explain what they are worried about, what has frustrated them and what they want their life to look like over the next few years - which is usually not expressed by most clients, although I’m lucky to have some that are super frank about their goals over e-mail too.
Sometimes that conversation uncovers an option they had not considered, or never even thought about because they didn’t know it existed; the mortgage should be built around the client’s short- and long-term goals. The first step is figuring out what those goals actually are, and the motivations behind them.
A 10 minute call often beats 25 back and forth emails!
Step Two: Gathering the Documents
Once I understand what the client is trying to accomplish, I send them a list of the documents needed to review their application.
The exact list depends on their situation, but it commonly includes documents confirming their income, debts, down payment and any properties they already own.
For an employed client, that may include:
A recent paystub
A letter of employment
T4 slips
For someone who is self-employed, we may need additional documentation, such as their T1 Generals, Notices of Assessment and business financial information.
Someone who already owns a property may need to provide a mortgage statement, property-tax bill and potentially a lease if the property is rented.
If the client is separated or divorced, I may also need the separation agreement. That helps confirm any child-support or spousal-support obligations that may not appear on a credit report.
For a purchase, we also need to understand how much money is available for the down payment and where that money is coming from.
Lenders need this documentation because they are not approving a mortgage based only on what someone enters into an online calculator. They need evidence supporting the income, assets, debts and obligations included in the application.
Step Three: Building the Application
Once the documents arrive, I use them to populate the mortgage application.
This is where we bring the different pieces together:
Who is applying?
How much do they earn?
How is that income earned?
What debts do they have?
How much is available for the down payment?
Do they own other properties?
What mortgage payment could they reasonably qualify for?
The lender does not necessarily qualify someone using the mortgage rate they will actually pay.
Canadian lenders may also need to apply the mortgage stress test, which means testing whether the borrower could still afford the mortgage using a higher interest rate. In this day and age, the stress test is the rate we’re aiming for + 2% (or if the rates are as low like in COVID times, it’s the benchmark rate of 5.25% - this applies if your interest rate + 2% is less than 5.25%).
The purpose is not to make the borrower pay at that higher rate. It is meant to provide some protection in case rates, expenses or other financial pressures increase later.
Once I understand the full application, I review the lenders and mortgage products that may fit. The lowest advertised rate is not automatically the right answer.
One lender might work better for a self-employed borrower. Another may have better policies for rental income. One mortgage might offer a lower rate but carry a much larger penalty if the borrower needs to break it early - so wouldn’t be my first choice if the clients expressed they’re looking to sell in a year or two.
The goal is to narrow the options down to a lender and mortgage that fit both the application and the client’s plans.
Can You Get Pre-Approved Without a Credit Check?
Sometimes, clients want a general idea of what they may qualify for without having their credit bureau pulled.
That is possible, but I would not consider it a complete pre-approval.
Based on the income, down payment and debts a client discloses, I can provide a rough estimate using current rates and lending guidelines.
The limitation is that I cannot independently verify the full debt picture.
The client would need to tell me about things such as:
Car loans or leases
Student loans
Lines of credit
Credit-card balances
Personal loans
Other mortgages
A missed debt could materially change the amount they qualify for.
There may also be something on the credit report that the client does not know about: an old account, a reporting error, a missed payment or a balance that is different from what they expected. Their credit could have taken a hit, rendering them ineligible for the product I’m reviewing.
Without reviewing the credit bureau, I can provide useful preliminary numbers, but those numbers come with caveats. I would describe that as an estimate or prequalification, not a lender-backed pre-approval.
What Happens During a Full Pre-Approval?
With the client’s permission, we pull the credit bureau and review the full application - that gives us a more accurate view of their debts, payment history and overall financial position. I can then submit the application to the lender selected for the pre-approval. The lender reviews the application and determines whether it is comfortable with the borrower, the documented income, the available down payment and the requested mortgage amount. It also takes into consideration a rough estimate for property taxes for the type of property you’re looking at, as well as (if applicable) rough estimate for monthly condo fees.
If the lender approves it, the client will generally receive:
A maximum approved mortgage amount
An estimated purchase-price range
An estimated mortgage payment
A rate hold for a limited period
In my lender pool, purchase pre-approvals are commonly valid for approximately 90 to 130 days. A rate hold can protect the borrower if rates increase while they are searching for a home. I like to think of this as an insurance policy for your rate - if you find a home during this period, and rates skyrocketed - the lender is guaranteeing that rate for your purchase (granted that the property is approved as well). If rates drop - that’s great, we negotiate for the better rate once we get your firm approval on your purchase.
Is a Mortgage Pre-Approval Guaranteed?
No. Well, not exactly. YOU are pre-approved, but not all hypothetical properties you are interested in are.
At the pre-approval stage, the lender has reviewed the borrower, but there is usually no property yet. Just a generic “based on your application, we guarantee this rate for a purchase at $XXX”. But that doesn’t mean all properties are a go.
Once you find a home, the lender still needs to approve the actual transaction and the property being purchased.
For example, the lender may need to review:
The purchase agreement
The property type and condition
The appraisal or estimated market value
Condo documents, where applicable
Property taxes
The source of the down payment
Any changes to your income, employment or debts
A lender may decline the final application if the property does not meet its guidelines, the appraisal comes in too low, or the client’s financial situation has changed since the pre-approval.
That is why I do not like telling people that they are “guaranteed” or completely safe simply because they have a pre-approval.
The pre-approval gives us confidence that the borrower fits the lender’s guidelines based on the information available at that time, but not a comment on the property. The property still matters. Keeping your finances steady during this time also matters.
What About a Refinance or Mortgage Transfer?
A purchase is where a traditional mortgage pre-approval is most useful because the client has not selected the property yet.
A refinance or mortgage transfer works differently.
The property already exists, so instead of simply providing a purchase-price range and rate hold, we can work toward an actual approval based on the existing property, mortgage balance, income and requested transaction.
I can provide an early estimate of the rates and numbers, but lender confirmation would come through an approval rather than a traditional home-purchase pre-approval.
A Pre-Approval Is Not the Same as a Budget
One final point is worth making: the maximum mortgage a lender is willing to approve is not necessarily the amount you should spend. The lender does not know every detail of the lifestyle you want to maintain. It may not know that you plan to have a child, travel regularly, pay for daycare, help support a parent or retire early, have costs for medication not covered through benefits, or enjoy eating out at fancy restaurants 3x a week.
A pre-approval answers:
What is the maximum mortgage the lender may be willing to provide?
Your personal budget answers:
What mortgage payment comfortably fits the life you want to live?
Those numbers do not always need to be the same. I know many who could be pre-approved for $2M for their purchase, yet choose to purchase at $600k. That’s what they are comfortable with, and that’s what fits their personal budget and how they’d like to spend their money.
The Bottom Line
A Canadian mortgage pre-approval is more than entering your income into an online calculator.
In my process, it generally involves:
Understanding what the client is actually trying to accomplish
Collecting the documents supporting their income, debts and down payment
Building and reviewing the complete mortgage application
Selecting a lender that fits the client and the transaction
Reviewing the credit bureau
Submitting the application for a lender-backed pre-approval for a potential future purchase (OR advising of products available and corresponding rates for transfers or refinances, with estimates on rates as of today - and suggestions forward for a full approval)
The result should give you a realistic idea of what you may qualify for and protect a rate while you search for a home.
But it is still not final approval.
A useful pre-approval does not just give you the largest possible number. It helps you shop with a clear understanding of your limits, the conditions attached to the approval and the mortgage options that fit where you are trying to go. Connect with me and we’ll start the steps together!
Jeff Dinsmore
Mortgage Broker
FSRA #10315
TMG – The Mortgage Group
VeloMortgage.ca
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Want to learn more? Here is some more interesting information:
Buying a home before maternity leave? The approval isn’t the problem
How to calculate an (approximate) mortgage payment in Canada
What’s the difference between insured, insurable and uninsured mortgages in Canada?
Samples of documents a lender may ask for in an approval/pre-approval