What is a Mortgage Loan Pre-approval

Even though preapprovals offer no guarantees when circumstances change, realtors prefer their clients to have one before they start the search for a new home. In Canada, preapproval follows a process of whereby the mortgage lender screens the client to determine his ability to make repayments against a mortgage.

The outcome is an estimate of the size of the mortgage for which the borrower will qualify, as well as the rate of interest for the initial term of the mortgage. The borrower will also receive an estimate of the monthly repayment.

Mortgage preapproval is a formal document from a lender indicating that you qualify to borrow a specific amount for a home purchase. This verification is based on an initial assessment of your credit history, credit scores, income, existing debts, and assets.

It’s important to note that preapproval is different from final loan approval, which requires a complete validation of all provided information.

As an essential step in securing mortgage financing, preapproval helps you understand your budget and shows sellers that you’re a serious buyer, giving you an edge in a competitive market.

The Factors Influencing the Mortgage PreApproval

Employment

The lender will require several details about your employment. He will want to know whether you are employed full time or part time. If you are part time employed, how many hours per week you are guaranteed? Do tips or commission form part of your income? If your income includes these, you could face a few problems proving the amounts.

How long have you been working for the same employer and is your employment stable? If you have just started at a job and you are still on probation, your employment income may be excluded.

If you are self-employed you may find yourself jumping through hoops to convince the lender to give you the mortgage for which you should qualify. A reputable, licensed mortgage broker can help you to qualify for a bigger mortgage.

Financial Obligations

Your debt to service ratio is an important determinant of the size of the mortgage for which you will qualify. To improve this ratio, you should pay off as much of your credit card and personal loans debt as you can afford before you apply for a mortgage.

• Other items that will affect the mortgage terms and conditions include
• Spousal and maintenance support obligations or receipts
• Co-signing of someone else’s loans
• The estimated cost of the amenities taking account of the size of the property that you hope to buy

Child tax benefits – some lenders will include this in your income.

Credit History

You must demonstrate your excellent credit history to the borrower. This means that you must have a record of payments against credit cards and loans stretching over a couple of years.

A good credit score is essential. If you are in A-lender territory you could get a mortgage that supports a gross debt ratio of 39% and total debt ratio of 44%.

Ironically if your profile puts you in B-lender territory you may qualify for a bigger mortgage as there are some alternative lenders who will allow you a 50% total debt service ratio.

Down Payment

Once upon a time if you had more than 50% home equity and some added assets borrowers didn’t worry too much about the debt service ratios. Those days are long gone. A 20% down payment is required if you wish to avoid the mortgage insurance required for high ratio mortgages.

If you are a non-resident or if you have recently immigrated into Canada, you may have to pay as much as 35% down payment.

Other Direct or Indirect Real Estate Holdings

Your ability to borrow may be heavily impaired if you are a co-signatory on any one else’s mortgage. You will have to disclose any information pertaining to any rental property that you may own.

How rental income and expenditure is treated will differ from lender to lender in the calculation of debt service ratios. This and the ownership of second properties such as holiday homes will affect to some extent the size of the mortgage for which you will qualify.

High Ratio or Conventional Mortgage

If you are unable to make a 20% down payment on your mortgage, yours is a high ratio mortgage and the lender will require default insurance. This, in effect, means that the insurer will make the final decision on whether you can borrow and how much.

Lenders often also obtain insurance on conventional mortgages. Typically, lenders cover the premiums themselves, so you probably wouldn’t even know about it. Even so, the insurer has the final say on whether you get the mortgage or not.

Terms and Conditions

If you have chosen a fixed interest rate the maximum amount for which you could qualify is calculated using the greater of the Bank of Canada Qualifying rate or 2% above your chosen mortgage contract rate.

If you’re going with a variable interest rate the maximum amount for which you will qualify will be based on the Bank of Canada qualifying rate. This means that you could qualify for a higher mortgage if you selected a variable interest rate.

The maximum amortization period is thirty years except where you have a high ratio and/or an insured mortgage in which case the maximum amortization period if 25 years. The longer the mortgage amortization period the higher the maximum amount.

Find the Best Terms and Conditions

Every one of the above factors affect the decisions pertaining to your mortgage application, and there may be more. Consulting a mortgage broker will help to ensure that you get the best terms and conditions. He will also help you to navigate through the pitfalls of financing a home and ensure that you get the product that best suits your lifestyle.

The Benefits of Mortgage PreApproval

Although pre-approval does not offer you any guarantees, there are still several undeniable benefits to getting mortgage preapproval.

It protects you against interest rates hikes for up to 120 days. You will not pay more than the rate that printed on your pre-approval. If the rates are lower at the time that the deal goes through you will still benefit from the lower rate.

You will have greater leverage when it comes to negotiating the conditions of purchase with the seller as he/she will know that you have the funds available and you are not wasting his/her time.

Pre-approval means that you go out into the realty markets in full knowledge of the amount that you can spend on the house of your dreams. This saves time and effort, as you can restrict your search to the properties that fit within the budget.

Contact your mortgage broker to assist with pre-approval.

How Does Mortgage Pre-Approval Ontario Work?

The mortgage preapproval process is a key step in home buying. It generally starts with your lender pulling your credit report and evaluating financial documents, including income, debts, and assets.

Once approved, you’ll receive a preapproval letter outlining the loan amount and estimated interest rate. Typically valid for 30 to 60 days, this letter strengthens your position when making an offer on a home. By understanding the steps and timeline, you’ll be better prepared to act quickly in today’s competitive market.

How Long Will the Mortgage Pre-Approval Last?

Since a pre-approval is based on a specific set of circumstances at a particular time in your life it follows that should those circumstances change significantly following the pre-approval, the pre-approval may change along with the change in circumstances.

Judging by the number of times that pre-approvals change it seems that many would-be home owners are not aware of this.

Common Pitfalls in the Mortgage Preapproval Process for Canadians

Navigating mortgage preapproval can be challenging, and Canadians often face specific hurdles along the way. Here are some common pitfalls to be mindful of:

• Overestimating Income – Miscalculating income can lead to unexpected denials.
• Ignoring Credit Score – A low score impacts rates and approval chances.
• Changing Jobs – Employment instability raises red flags.
• Accumulating Debt – New debt affects debt-to-income ratio.
• Overlooking Hidden Fees – Costs like closing fees can surprise buyers.

Being aware of these pitfalls can help you approach preapproval with confidence and avoid unnecessary setbacks.

Gathering Required Documents for Mortgage Preapproval in Canada

Preparing for mortgage preapproval requires specific documentation to confirm your financial stability. Here’s a list of essential steps:

1. Verify Income – Provide recent pay stubs, T4s, or W-2s to confirm your earnings.
2. Show Employment Proof – Submit proof of employment, often a letter from your employer.
3. Provide Financial Statements – Bank statements and investment summaries reveal assets and financial health.
4. Document Down Payment – Show proof of available down payment funds.
5. Include Additional Income Sources – For self-employed or rental income, gather tax returns and business statements.

Having these documents ready can streamline the preapproval process and ensure a smoother experience.

Calculating Your Debt-to-Income Ratio

Your debt-to-income (DTI) ratio reflects the percentage of your gross monthly income dedicated to monthly debt payments, providing lenders insight into your borrowing risk. To calculate your DTI ratio, add up all monthly debt obligations, including credit cards, car loans, and any other debts, then divide by your gross monthly income.

Formula:
DTI Ratio = 100 x Total Monthly Debt Payments / Gross Monthly Income

Example:
If your monthly debts total $1,200 and your gross monthly income is $4,000:

DTI Ratio = 100 x 1200 / 4000 = 30%

Aim to keep your DTI ratio below 36% for a better chance at favorable mortgage rates and terms. Managing this ratio helps present you as a less risky borrower.

Choosing a Lender or Mortgage Broker

• Mortgage Lenders – Offer direct preapproval and lending services.
• Mortgage Brokers – Provide access to a broader range of mortgage products from multiple lenders.
• Compare Options – Evaluate offerings from various lenders to find the best fit for your needs.
• Ask About Partnerships – If using a broker, inquire about the lenders they work with.
• Clarify Fees – Confirm any fees that lenders or brokers may charge during the preapproval process.

Making these comparisons can help you choose the option that best suits your financial goals.

Mortgage preapproval is more than just a formality; it’s your ticket to understanding how much you can afford and positioning yourself as a serious buyer. By taking steps like calculating your debt-to-income ratio, gathering documentation, and choosing the right lender or broker, you can optimize your chances of securing the best mortgage terms. Remember, working with a knowledgeable mortgage broker can help streamline the process and guide you through each stage. Get preapproved, stay prepared, and start your journey to finding your dream home with confidence.