Do I Need to Get a Mortgage Pre-Approval?
There's a common misconception among some homebuyers that if you've got a pre-approval, your mortgage is basically guaranteed. This usually isn’t the case. Having a pre-approval doesn't guarantee the lender will fund your mortgage.
Below, let's explain what a mortgage pre-approval is and whether it's worth getting one for you.
What Is a Mortgage Pre-Approval?
A mortgage pre-approval is a conditional approval granted by a lender based on a preliminary review of your financial situation and creditworthiness. Conditional approval means that they are approving you based on some conditions/assumptions that will have to be confirmed later on.
While this preliminary approval usually requires a credit check, information about your debts and income are based on details you provide to your broker, which are then shared with the lender. A pre-approval is often based on that information alone, without the lender verifying the documents or knowing which property you're going to buy.
For these reasons, a pre-approval isn't binding until a lender has a chance to do its own due diligence and fully verify your financial information. It will also have to review details of the property you plan to purchase, which can include requiring an appraisal and/or inspection. Of course, as your broker, I can give you a much better understanding of what will and won't be accepted.
Mortgage Pre-approval is sometimes called Mortgage Prequalification or Mortgage pre-authorization. Each lender/bank can have its own definitions for what it means and what is needed to get one.
Types of Pre-Approvals
Knowing the differences between pre-approval types and how thoroughly they check your information is important. Here's a simple guide from the basic to the most detailed pre-approvals.
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This is the most basic form of pre-approval where the lender provides a preliminary interest rate for a specified period, typically ranging from 60 to 120 days. This type of pre-approval offers minimal scrutiny, as the lender usually relies on the borrower's self-reported information without verifying income, assets, or credit history. A “Surface-Level” Rate Hold has no value except the rate if you qualify.
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Involves a brief assessment of the borrower's financial situation based on self-reported information. It provides an estimate of the loan amount the borrower may qualify for. This type of pre-approval has limited scrutiny as the lender may not perform a credit check to evaluate the borrower's creditworthiness or review any documentation. Initial Pre-Qualification provides the same benefit as obtaining an assessment with a basic mortgage calculator.
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A more comprehensive assessment where the lender reviews the borrower's key financial documents, such as pay stubs, bank statements, or tax slips. It provides a conditional approval subject to further verification. This type of pre-approval requires moderate scrutiny for the borrower, as the lender verifies the borrower's income, assets, and credit overview to determine their eligibility for a mortgage. Conditional Pre-Approval is okay for estimating the budget, but not for any serious offers.
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The most rigorous form of pre-approval where the lender thoroughly evaluates the borrower's financial profile, including employment history, debt-to-income ratio, and credit score. It provides the same level of analysis that will be done on the mortgage application to ensure the same result. A high level of scrutiny is involved as the lender conducts a comprehensive review of the borrower's financial documents, employment verification, and credit report. This type of pre-approval carries more weight in the homebuying process and offers greater certainty to both the borrower and seller. This type of pre-approval provides the highest level of confidence and minimizes risk for all.
If you’d prefer to get some numbers right away, try our Mortgage Affordability Calculator
Where Do I Get a Mortgage Pre-Approval?
You can get preapproved by different kinds of mortgage lenders and mortgage brokers. A mortgage broker can help you quickly compare and choose from many of the following types of mortgage lenders:
Big Banks
Credit Unions
Mortgage Companies
Trust Companies
Insurance Companies
Each lender will have its own mortgage offerings that you need to compare. Aside from the interest rate, ask your mortgage broker about the fees, penalties, and other costs. Ask about mortgage prepayment options and find out about the kind of customer service that they offer. For example, does your mortgage company provide online access to your account? Is there an app where you can track your balance and payments? Is it easy to contact them to make changes or inquiries?
What Do I Need to Get a Pre-Approval?
Your mortgage broker can give you specific details on the documents needed. Each lender will have different expectations, and some documents might not be needed right away.
Your mortgage broker will need to understand:
Your income
Your debts
Your assets
You may be asked to provide documents for your pre-approval, including things like:
ID (driver's license, passport, etc.)
Proof of employment (such as a recent pay stub, job letter)
Proof of your down payment
Proof that you can pay for closing costs (usually 1.5% of the purchase price)
Information about your other mortgage(s) and property taxes if you have other property
Recent tax statements, Notice of Assessment, T4s or others depending on your income types
Separation Agreement, Child Support information, Student Loans, and Car Loan information or documents
What Happens After I Get Pre-Approved?
Once you are preapproved, you should make sure you understand the terms of the pre-approval. You will need to know:
How long the pre-approval is valid (usually 60-120 days)
What happens if rates go down? Will your rate drop also?
Anything else you don't understand about the lender or mortgage
Also, once you have a pre-approval, you should avoid the following:
Don't change jobs before you move, even if the new job has a higher pay
Don't apply for other credit, including store credit for furniture, vehicle loans, credit cards, etc
Don't make any major purchases without checking with your mortgage broker first.
Pros and Cons of a Pre-Approval
Pro: They let you know roughly how much you can qualify for based on the preliminary financial information you provide to the lender.
Con: Not all lenders offer pre-approvals, which could limit rate options somewhat for those wanting a pre-approval.
Pro: The process is generally quick and can often be performed online.
Con: Some pre-approvals can come at a cost, potentially adding anywhere from 15 to 25 bps to your rate. Lenders that offer pre-approvals are hedging their offers and must honour the rate they quote if they go forward with funding the mortgage. This can result in potentially higher funding costs, which is why many rates with pre-approvals are priced at a slight premium.
Pro: Peace of mind while house-hunting. Having a pre-approval can give you greater confidence when shopping for your house, as you can set an appropriate budget based on the mortgage you can qualify for.
Con: A pre-approval usually isn't a guaranteed approval, so it is still wise to have a financing condition included in your offer.
Pro: Lock in a rate. If you're concerned about mortgage rates rising during the home-buying process, getting a pre-approval is a good way to lock in a rate, which lenders will typically hold for up to 90 or 120 days.
Should You Get a Pre-Approval?
Usually, yes! You should always plan ahead and know what you can afford. Pre-approvals are often a good starting point when shopping for a mortgage. Let's talk about your unique situation and whether a pre-approval is right for you.
