Mortgage Pre-Approval: Why It Matters, How to Get It
A mortgage pre-approval is an estimate of how much you can borrow to buy a home. During the mortgage pre-approval process, you'll share financial information with a lender or mortgage broker so they can decide how much you're eligible to borrow.
After you're pre-approved, you'll know your potential mortgage rate and monthly mortgage payment. Armed with a pre-approval, you'll be able to make a stronger offer on the home you hope to buy.
The mortgage pre-approval process
To get pre-approved for a mortgage, you'll submit a significant amount of financial information to either a mortgage broker or to a bank's in-house mortgage advisor.
The information requested generally includes:
General identification.
Banking details.
A list of assets.
A detailed accounting of your debts.
Once your finances have been evaluated and stress tested, you'll be presented a list of mortgage options. Choosing among those options — fixed or variable mortgage rate, term, amortization length — will determine the amount you're pre-approved for.
Once the pre-approval process is finished, you'll be presented with a pre-approval letter that can be shown to home sellers so they know the offer you make is legit.
During a mortgage pre-approval, you'll learn
The maximum loan amount a lender is willing to provide.Â
The mortgage rate and rate type you'll be paying.
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.
How long does a mortgage pre-approval take?
Once you apply, it generally takes about 24 to 48 hours to get a response, but it could take a week or more to have your pre-approval completed. It often depends on how busy the mortgage market is and whether the lender or broker you're working with has the capacity to meet demand.
Speeding up the pre-approval process generally comes down to you. Providing all the information required can prevent delays. Even small omissions can halt the process for days.
Being pre-approved for a mortgage is not the same as being approved. 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.
Why mortgage pre-approval is important
Budget setting
The primary reason for getting a mortgage pre-approval is to set a realistic home buying budget.
If you don't get pre-approved by a lender, you won't know how much mortgage you'll be approved for. If you make an offer on a home, have it accepted and then find out that you can't get the mortgage you need, you could face a legal and financial nightmare.
Getting pre-approved can also be helpful in limiting your home search. By capping how much you can spend, a pre-approval saves you from viewing properties you can't afford.
Locking in a rate
Lenders often will lock the mortgage rate they offer for a set amount of time, ranging from 60 to 130 days.
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.Â
Rate locking can be beneficial when mortgage rates are volatile. If interest rates rise between your pre-approval and when you actually make an offer on a house, you should get the rate you were pre-approved for.
And if rates drop during that period, you should be able to negotiate a the lower rate.
Common mortgage pre-approval outcomes
An application for a mortgage pre-approval typically results in one of three scenarios.
Scenario 1: Your pre-approval amount is sufficient for home-hunting in your market
What to do:
Don't lose sight of the amount you’ve been pre-approved for. Bid beyond your pre-approval amount and you may have to scramble to get the funding you need to close on the purchase.
Consider a financing clause. You can ask buyers to make your bid contingent on securing financing. If you do go over your pre-approval amount, this condition can save you from having to follow through on your offer. our offer exceeds your pre-approval amount.
Remember that a pre-approval is not a legally binding loan agreement. 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 lower than you hoped for
What to do:
Save a larger down payment. Making a larger down payment means taking out a smaller loan to buy more house. A down payment of 20% frees you from having to buy mortgage default insurance, which can add thousands of dollars — plus additional interest — to your loan amount.
Reduce debt. If your gross and total debt ratios are too high, you won’t be approved for the mortgage you want. Paying down as much debt as possible can get those ratios down to manageable levels.
Adjust your expectations. Find a smaller or older home, or one in a community where the prices are lower.
Scenario 3: Your pre-approval application is denied
What to do:
Explore B lenders. If you didn’t use one for your initial application, reach out to a mortgage broker, who may be able to introduce you to lenders that are more willing to fund your home purchase.
Get a co-signer. 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-approval vs. mortgage pre-qualification
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. |
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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