Kurt Woock
Clay Jarvis
Mary Flory
A mortgage pre-approval is a process in which you share your financial information with a lender, and the lender gives you an estimate of how much you can borrow, the mortgage rate you’ll be offered and what your monthly payment could look like.
Why mortgage pre-approvals are important
Many financial products are standardized products. For example, the checking account you have at a bank is typically identical to the checking accounts of other customers at that bank. You’ll all earn interest at the same rate and pay the same fees, for example.
But mortgages work differently. The terms of a mortgage are unique to each individual. Window shopping for mortgages by checking rates on a bank’s website doesn’t tell you much about the specifics you’ll receive if you apply. You need a mortgage pre-approval to get that information.
What you’ll get after you’re pre-approved
A mortgage pre-approval is the way to get the personalized details that are crucial to have if you’re seriously considering buying a home. When you have a pre-approval in hand, you’ll:
- Know the max amount a lender is willing to finance. Unless you can increase your down payment amount, this amount will inform the max amount you can offer and help you begin to understand what you can afford.
- See the interest rate you’re offered, and, as a result, your projected monthly mortgage payment. A projected payment is the best way to see if the max amount you can borrow will fit in your budget, or if you should plan to set a lower limit for yourself.
- Lock in a rate. Lenders often will lock the mortgage rate they offer for a set amount of time, ranging from 60 to 130 days. If you make an offer on a home during that time and interest rates rise, your rate won’t increase (if rates drop, you’ll get the lower rate).
Nerdy tip: It’s important to note that being pre-approved for a mortgage is not the same as being approved for a mortgage. A mortgage pre-approval is an estimate of how much you should be able to borrow. Once you’ve made a successful offer on a house, you’ll have to formally apply for a mortgage. If your application is approved, you’ll formally agree to the final terms and conditions.
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Where to get pre-approved for a mortgage in Canada
You can get pre-approved for a mortgage at most financial institutions that offer home loans, including:
- Canada’s Big 6 banks: TD Bank, RBC, BMO, Scotiabank, National Bank and CIBC.
- Credit unions: Including Vancity, Meridian Credit Union and Access Credit Union.
- B lenders: Including First National Financial, MCAP and MERIX Financial.
To get pre-approved, you can either deal directly with a lender or with a mortgage broker, who will compare mortgage offers at various lenders and pre-approve you for one that fits your unique financial circumstances.
Pre-approvals can be done in-person or online. To ensure your pre-approval proceeds smoothly, make sure you pay close attention to the documents requested by your mortgage advisor. An error or omission can delay the process.
What you can expect after you submit your information
Mortgage pre-approvals and your credit score
As part of the pre-approval process, a lender will conduct a hard credit inquiry, which will temporarily lower your credit score. A hard check can temporarily knock a few points off your credit score, so make sure yours is in good shape before applying.
If you plan to get pre-approvals from multiple lenders, consider doing them around the same time because multiple inquiries over a short period of time, typically 14 to 45 days, usually count as a single hard check.
Timing your pre-approval application
Once you apply, it generally takes about 24 to 48 hours to get an answer, but it could take a week or more in some cases. It’s usually best to complete a pre-approval before you make an offer on a house. If the seller accepts your offer but you can’t find a lender to agree to fund the purchase, you’ll still be obligated to complete the sale. Getting pre-approved for a particular amount, and adhering to it during the bidding process, can protect you from what could be a legal and financial catastrophe.
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What happens after a mortgage pre-approval?
An application for a mortgage pre-approval typically results in one of three scenarios.
Scenario 1: Your pre-approval amount is sufficient
Main takeaway: You’re ready to explore the housing market and make an offer on a home that fits your budget.
Next steps
Don’t get swept up in a bidding war and lose sight of the amount you’ve been pre-approved for. Unless your offer is contingent on securing financing — a condition many sellers won’t be interested in in a busy market — you’ll have to find a way to make up the difference if your offer exceeds your pre-approval amount.
Remember that a pre-approval is not a legally binding loan agreement. If you decide to purchase a house, you’ll have to formally apply for a mortgage. The final amount you’re approved for may differ from the pre-approval amount, especially if your credit or employment situation has deteriorated since you were pre-approved.
Scenario 2: Your pre-approval amount is too low
Main takeaway: The lender is willing to provide a mortgage, but not for the amount you hoped for.
Next steps
Save a larger down payment. Making a larger down payment means taking out a smaller loan, which creates less risk for your lender. A down payment of 20% or more also frees you from having to buy mortgage default insurance, which can add thousands of dollars — plus additional interest — to your loan amount.
Eliminate debt. When lenders examine your finances during pre-approval, they’ll take a close look at the amount of debt you’re carrying, particularly your gross and total debt ratios. If those ratios are too high, you won’t be approved for the mortgage you want. Paying down as much debt as possible is a wise move when trying to get pre-approved.
Adjust your expectations. If buying a home sooner rather than later is a top priority, lower your budget.
Scenario 3: Your pre-approval application is denied
Main takeaway: The lender is unwilling to lend you any amount.
Next steps
Consider applying with a different lender. If you didn’t use one for your initial application, consider using a mortgage broker for the next one. A broker may be able to introduce you to lenders that are more willing to fund your home purchase.
Consider finding a co-signer for your mortgage application. A co-signer with a stronger credit score, higher income or less debt can help make you seem like less of a credit risk.
Mortgage pre-approvals and rate locks
Once your mortgage pre-approval goes through, your interest rate will typically be locked in for 90-120 days. If interest rates go up during that time, you still get the promised rate. If rates fall, you can negotiate and try to get a better rate when you’re ready to close.
Some lenders can only hold fixed rates during the pre-approval period. Variable mortgage rates are determined by the movement of the Bank of Canada’s policy rate, so they can’t always be guaranteed.
Pre-qualification vs. pre-approval
These two terms might seem interchangeable, but they are separate processes that give you different levels of certainty regarding your home buying budget.
| Mortgage pre-qualification | Mortgage pre-approval | |
| Summary | An easy way to estimate how large a loan you may be approved for. | An in-depth review of your finances resulting in a custom mortgage quote that should resemble what a final mortgage application will look like. |
| Time commitment | Quick. Most financial institutions have an online pre-qualification tool where all you need to enter is your income, debt and assets. | Moderate. You’ll need to gather and send documentation — tax forms and pay stubs for example — that backs up the information you submit. This step could take longer if those documents aren’t readily available. |
| Use case | You’re just getting familiar with the home-buying process. This is a good tool to start honing in on what a budget could look like. | You’re seriously considering making an offer on a home in the near future and want the most accurate estimates. You’ll be able to fine-tune your budget, and you can lock in a rate if you’re approved. |
| If you complete this step, do you still need to apply for a mortgage? | Yes. In fact, you’ll probably want to get a pre-approval before making any offers to ensure there’s a lender who’s willing to work with you. | Yes. Even though a mortgage pre-approval is a paperwork-intensive process, it’s not a replacement for the mortgage application, which is the actual agreement between you and the lender. |
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