They say that buying a home can be one of life’s more stressful events. It’s no time for surprises. That’s why a mortgage preapproval is so important. Not only is it the first step in the home buying process, it eliminates a lot of financial uncertainties and puts you in control of your home purchase. In this article, we’ll explain everything you need to know about mortgage preapprovals and provide you with a few tips to make the process that much easier.

What Does Preapproved Mean?

A mortgage preapproval is beneficial since it helps your lender determine the maximum mortgage amount you can be approved for based on your current employment status, income and creditworthiness.

Benefits Of A Mortgage Preapproval

As the borrower, you get the reassurance of knowing the maximum mortgage amount that you can qualify for, which will come in handy when you’re out shopping for a home. Also, real estate agents prefer to deal with clients who have already been preapproved for their mortgage because it gives them a level of certainty of knowing that if they help you find the right home, you’ll be able to follow through with the purchase. Keep in mind, though, that once you do find a home, your mortgage application is readjudicated and can be denied.

When you meet with your lender for a preapproval, they will book an interest rate for you for a specific period of time, usually 90 – 120 days. This means that if mortgage rates happen to rise while you’re house shopping, you’ll be covered with the rate guarantee. Your preapproval won’t be compromised by a sudden increase in the mortgage rate. However, you should be aware that some changes to the application can potentially jeopardize your preapproval. And most preapprovals come with a surcharge.

To summarize, here are the key benefits to obtaining a mortgage preapproval:

  • Determines the maximum amount you can spend on a home
  • Locks in an interest rate for up to 120 days
  • Identifies any financial concerns that must be addressed
  • REALTOR® knows that they’re dealing with a qualified borrower

How To Get Preapproved For A Mortgage

To obtain your mortgage preapproval, start by booking an appointment with a mortgage broker at the financial institution you deal with. Make sure to ask them what documents you’ll need to bring to the meeting. They’ll take your application, which will include a check of your credit report, a gathering of your employment and income data and a full list of your assets and liabilities.

Your lender will present you with your various options, such as current interest rates, open versus closed mortgages and the length of the mortgage term. Don’t worry if you’re unsure, most of these details can be changed later (though you could be subject to the interest rates available at that time).

Once your application has been preapproved, you can begin house hunting. If you haven’t already done so, this is when you would make contact with a REALTOR®, who can help you find a house that’s in your price range and meets your needs.

When you find the home you want to buy, your agent will guide you through the process of making an offer and will negotiate on your behalf. With an accepted offer to purchase in-hand, you can then return to your lender to complete the mortgage approval.

Document Requirements For Mortgage Preapproval

When you visit a mortgage lender to get preapproved, you’ll be expected to provide several documents to qualify. While the requirements may differ slightly from one lender to the other, below is a list of documents and other information you can expect to provide:

  • Government-issued identification, like a valid driver’s license or passport
  • Proof of employment/income
  • Confirmation of down payment
  • Confirmation of other assets, like registered retirement savings plans (RRSP) or vehicles
  • A listing of existing liabilities

Proof Of Employment/Income

To qualify for a mortgage preapproval, you’ll need to provide your lender with satisfactory income confirmation. If you work at a regular, salaried or hourly full-time job and your income doesn’t fluctuate, a pay stub will often suffice along with a year-end income document, such as your most recent T4 slip or CRA Notice Of Assessment (NOA).

Things get a bit more complicated if your income fluctuates due to seasonal or self-employment or if you have commission-based earnings. Employees who work a lot of overtime can also fall into this category. In these cases, most lenders will take an average of your income over the previous 2 or 3 years. To confirm, you’ll need to provide NOAs and possibly a copy of your income tax returns, otherwise known as T1 Generals.

Pay stubs and/or bank statements provided need to be recent – dated within a couple of months – to be considered. A letter of employment from your workplace may also be acceptable.

Confirmation Of Down Payment

To be preapproved, you’ll also need to show your lender where your down payment is going to come from. There are a few sources you can use, including your personal savings, RRSPs, the sale of another property or a gift from a parent or other immediate family member. Because you’re still at the preapproval stage, you don’t need to have your down payment available yet, just a plan as to where it’ll come from when it’s required. Here’s a full list of potential down payment sources:

  • Accumulated savings
  • Personal investments
  • Home Buyers RRSP withdrawal (first-time home buyers)
  • First-time home buyer incentive
  • Settlement from a marital split
  • Sale of existing property
  • Gift from a family member
  • Proceeds from an inheritance

Preapprovals And Insured Mortgages

If you’re planning to put less than a 20% down payment toward your home purchase, your mortgage will need to be insured by a third party, most often the Canada Mortgage And Housing Corporation (CMHC). However, mortgage preapprovals aren’t vetted by the CMHC. This means that once you’ve found a home to buy, your mortgage application will need to be reviewed and approved by your lender and by CMHC. Genworth and Canada Guaranty are the two other companies that provide mortgage default insurance in Canada.

Will A Preapproval Hurt My Credit?

Anytime you apply for credit, be it a credit card or a mortgage preapproval, the corresponding enquiry will have a short-term impact to your credit score. But you can’t get a mortgage without submitting an application, so it’s nothing you should worry about. What we don’t recommend that you do is obtain preapprovals from multiple lenders, as the repeated hits to your credit report could have a larger adverse impact. Multiple inquiries for mortgage financing within a 45-day time frame count as one hit. It’s wise to stick with one lender for your actual preapproval.

Final Thoughts On Mortgage Preapproval

Obtaining a mortgage preapproval is the best way to make sure you’re ready financially when you find the home you want to buy. But always remember, a preapproval is not a 100% guarantee. If something changes with your employment or your credit report, a preapproval can be invalidated. As we mentioned at the outset, the last thing you want when you’re buying a house is surprises. If there are potential concerns that come up during the mortgage preapproval process, it gives you time to address them. The more prepared you are, the better.

If you’re ready to get a preapproval, Edison Financial is here to help.

Tom Drake is an authority in Canadian personal finance. He is a financial analyst and has been writing about personal finance since 2009 at the award-winning MapleMoney. His work has appeared in MintLife, Canadian MoneySaver, and U.S. News & World Report, and has been quoted in The Globe and Mail, Yahoo Finance, and Financial Post.