• Adam Stapley

What is a Mortgage Pre-Approval? | Canadian Finance Guide

If you’re planning to buy your first home, you may be wondering what a mortgage pre-approval is. If you’re like the majority of Canadians, you’ll use a mortgage when purchasing your home. A mortgage pre-approval is the first step you take towards your goal of homeownership.


Two women in white completing a mortgage pre-approval application at a table

What is a Mortgage Pre-Approval?


Buying a home in Canada is a large monetary transaction. Home buying is likely the largest financial decision most people will ever make. When buying a home, both parties enter into a contractual agreement that they must complete by a certain date. Failing to do so can result in massive legal problems for the buyer.


A mortgage pre-approval, also known as a mortgage prequalification, is an essential part of the buying process. This step involves having a mortgage broker review your finances to determine your maximum buying power. Completing this initial step also helps ensure a higher chance of mortgage approval when you’re ready to buy. Due to the legalities of not closing on time, it is super important to have a mortgage prequalification when looking to buy your first home.


How Does a Mortgage Pre-Approval Work?


Getting a mortgage prequalification is much like an actual mortgage approval. The mortgage broker will help you complete an initial application and review it to determine the following:

  • What is the maximum mortgage amount you will be approved for?

  • How much down payment will you need for your purchase?

  • Will you need to pay off existing debt before closing?

  • Is your credit score good enough to qualify for mortgage approval?

  • Will you need a cosigner?

  • What types of mortgage lenders will you qualify with?

  • What mortgage interest rate are you likely to qualify for?

  • How much will your monthly payments be?

Application


This application details your entire financial life. You may complete this application, in pen and paper, online or through a conversation with the mortgage broker. The application contains detailed information about your:

  • Name, date of birth, contact information

  • Address history, dependents

  • Employment history

  • Assets and liabilities (debts)

  • Any properties currently owned including:

  • Mortgages

  • Rents

  • Taxes and maintenance fees

  • Information about the property (or potential property)

Documentation


After completing the mortgage pre-approval application, the mortgage broker will ask for documentation to confirm the details you provided. Though there can be several different documents you will need, here are some of the basics:


Employed

  • Letter of employment - a letter from the employer, manager or human resources department confirming your employment and income

  • Pay stubs - recent pay stubs issued with your regular cheque/deposit

  • Past two years T4s - the tax form your employer provides in February, confirming the amount of income paid to you in the previous year

  • Bank statements - monthly bank statements showing where your down payment will come from

Self-Employed

  • Past two years T1 Generals - the tax form you or your accountant files with Canada Revenue Agency

  • Past two years Notice of Assessments - the tax document received from the Canada Revenue Agency showing your income and amount of taxes owing or to be refunded

  • Articles of incorporation or master business license - this document proves your business exists and when it started

  • Bank statements - monthly bank statements showing where your down payment will come from. The mortgage broker may also need these documents to prove your income as a small business owner to the loan provider

Credit Check


The credit check is an essential part of a mortgage prequalification. During this phase, the mortgage broker will review your credit bureau from one of the major credit agencies, Equifax or Transunion. They will compare this information to your application to ensure accuracy.

Tired kid sitting behind laptop

The credit score and information in your report (such as missed payments, collections items, length of history etc...) help determine the mortgage lender and interest rate you may receive. The mortgage broker uses this information to provide credit advice that can increase your chances of mortgage approval.


Do I need a Mortgage Pre-Approval?


While it’s not a requirement to have a mortgage pre-approval to place an offer on a home, you may want to consider one anyway. This process ensures that your finances are in order and that you will have no trouble getting mortgage approval to close on your first home.


Without a mortgage prequalification, you could find yourself in a difficult situation if you cannot qualify for the loan. You could end up needing high-interest loans, or worse, find yourself in legal trouble if you’re unable to close on the property. In fact, due to the seriousness of buying a home, many real estate agents will refuse to help you buy a home if you do not have a mortgage pre-approval.


What to do After Getting a Mortgage Pre-Approval

Couple hugging and holding house keys

Once you receive your pre-approval, the next step is to find a real estate agent to work with. Your mortgage broker may provide you with the contact information for a couple of potential candidates. The real estate agent will work together with you and your mortgage broker to ensure that they find homes suitable to buy. This step is crucial because most mortgage lenders have certain criteria for the homes that they secure your mortgage on.


Where to Get a Mortgage Pre-Approval


While many Canadians prefer to work with their bank, an increasing number of Canadians seek out mortgage brokers to help them with their mortgage prequalification. The benefits of working with a mortgage broker are many, but the key points are:

  • Their ability to work with many lenders

  • Often offer the most competitive mortgage interest rates

  • They help you organize your finances towards your goal of homeownership

  • Provide independent and unbiased advice on mortgage companies and products

  • Can often get a mortgage approval when the banks say no

Are You Ready for A Mortgage Pre-Approval?

Not only do I write this (fantastic) blog, I am also a mortgage broker licensed in Ontario. If you're ready to buy your first home, you can fill out a quick online mortgage pre-approval application. Prefer to chat first? So do I. Book your free consultation today!


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