Whether you’re a first-time home buyer or looking to upgrade, mortgage pre-approval is an essential step in the home-buying journey. It helps you understand exactly what you can afford while signaling sellers that you’re a serious buyer.
So, before you decide to take out a mortgage, here’s everything you need to know about the mortgage pre-approval process to help you close on your dream property.
What is a mortgage pre-approval?
A mortgage pre-approval means a lender has reviewed your financial situation, including your credit history, income, and existing debts, and qualified you for a certain loan amount. This thorough review often involves examining the following documents:
- A recent pay stub and bank accounts
- Recent financial statements (credit card, mortgages, loans)
- Proof of any other assets (properties, vehicles, investments)
Unlike casual estimates from online mortgage pre-qualification tools, a mortgage pre-approval is considered the gold standard for setting up your home-buying budget.
How to get pre-approved for a mortgage
To get pre-approved for a mortgage, you must first provide detailed financial information to a mortgage broker or lender, such as your income, expenses, debts, and credit history. For convenience, you can apply online for mortgage pre-approval, allowing you to start the process quickly and easily.
Here’s what you can expect in a pre-approval process:
- Submit your documents: Depending on the lender’s requirements, you may present any or all of the following: recent pay stubs and employment information, tax returns, recent financial statements, housing expenses, and proof of other assets. If you are self-employed, you may need to provide additional documentation, such as tax returns or Notice of Assessments, to verify your income.
- Get ready for a credit check: During the application process, lenders will conduct a hard credit inquiry, which can temporarily lower your credit score. So before applying, aim to keep your credit score in tip-top condition (preferably more than a 650 credit score).
- Choose your lender: Most lenders, including major banks, credit unions, or even B lenders, now offer mortgage pre-approval online. Once you get your pre-approval letter, you can then compare your mortgage options to get the best deal.
After your finances are checked and stress-tested, your lender will share the maximum amount you qualify for, including monthly payment estimates. You can then explore your mortgage options, such as the type of mortgage you want (fixed vs variable), mortgage rate, and mortgage terms.
It’s essential to manage your finances effectively to increase your chances of getting pre-approved for a mortgage and for a higher amount. This includes paying off high-interest debts, building an emergency fund, having a sufficient down payment or the ability to cover closing costs, and maintaining a good credit score.
What does pre-approved mean?
Pre-approved means the lender is willing to lend you money, but it is not necessarily a guarantee of final mortgage approval. After pre-approval, you must still go through the final approval process, where the lender thoroughly reviews all your documentation and eligibility before fully approving the mortgage. For sellers, a pre-approved mortgage can be a good sign that you’re a serious buyer, increasing your chances of securing your dream home.
Mortgage pre-approval vs mortgage pre-qualification
These two terms might appear the same, but they are separate processes in your mortgage application.
| Mortgage Pre-Approval | Mortgage Pre-Qualification | |
| Summary | An in-depth process that involves a financial review, resulting in a pre-approval letter. | A quick estimate of how much you may be approved for a mortgage. |
| Information required | Requires verified income/assets. | Relies on self-reported data. |
| Time commitment (until approval) | Hours to days. | Can usually be completed in minutes. |
| Credit report | Includes a credit check. | No credit inquiry. |
| Terms | Typically locks rates for 90-120 days. | Only provides a general estimate. |
Keep in mind that both pre-qualification and pre-approval processes are not final guarantees, which means you still need to apply for a mortgage.
Where to get a mortgage pre-approval
Mortgage lenders
Mortgage lenders are financial institutions that directly lend money to borrowers. There are several types of lenders, each with their own interest rates, conditions, and products:
- banks
- credit unions
- alternative and private mortgage lenders
Mortgage broker
Mortgage brokers don’t lend money directly to borrowers. Think of them as middlemen, bridging you to several mortgage lenders so you may have a wider range of mortgage products to choose from.
How long does mortgage pre-approval take?
The pre-approval application itself can be completed in just minutes. Depending on your financial situation, most lenders will issue pre-approval letters within a week after receiving complete documentation.
5 key factors to consider during the pre-approval process
The following five factors play a role in determining the mortgage amount and rate you’ll be pre-approved for:
- Credit score: This three-digit number (from 300 to 900) is used by financial institutions to assess your creditworthiness or your ability to manage your financial obligations. According to Equifax, a good credit score is somewhere between 660 and 759, while 760 and up are considered excellent. A higher credit score may make potential lenders more confident about your ability to repay debt and may give you better rates.
- Debt service ratios: In Canada, two debt service ratios are often assessed: the total debt service (TDS) ratio and the gross debt service (GDS) ratio. Lenders use these two ratios to calculate the largest monthly mortgage payment you can afford based on your current monthly income, expenses, and debt.
- Down Payment: The minimum down payment amount you need depends on the purchase price of the home. A minimum of 5% is required for homes under $500,000. In comparison, a larger down payment (20%+) not only avoids mortgage default insurance but also helps increase pre-approval odds.
- Income and employment: Lenders like predictability when it comes to mortgage financing, which is why those with long-term employment with consistent earnings may be deemed more reliable than those with sporadic income. Your income reveals how much you make, while your job history can show whether you have steady and consistent employment.
- Proper documentation: Collecting the documentation needed to start the mortgage pre-approval process can take time, so it’s best to start early. Ensure all financial records (pay stubs, tax returns, bank statements) are up-to-date, properly signed, and organized to meet lender requirements and avoid delays.
In addition to the five factors above, paying attention to interest rates is essential. A rate lock can protect you if interest rates rise during the pre-approval period, ensuring you keep your quoted rate even if the market changes. If rates drop during the pre-approval period, you may be able to negotiate a lower rate.
Common questions about mortgage pre-approvals
Does mortgage pre-approval affect credit score?
A pre-approval application may lower your credit score because lenders usually conduct hard inquiries on your credit reports. However, multiple inquiries from different lenders between 14 and 45 days can only be counted as one hard inquiry, allowing you to shop around without worrying.
How long does a mortgage pre-approval last?
Most approvals last 90–130 days, during which the lender will hold the interest rate they offered. After a pre-approval expires, you will need to reapply.
What to do if your pre-approval application is denied
If your pre-approval application is denied, consider adding a co-borrower with a stronger credit score or higher income to help make you less of a credit risk. Another option would be to explore alternative lenders who are more willing to provide funding with flexible qualification criteria.
Unable to get pre-approved? Consider a home equity loan with Alpine Credits
While the mortgage pre-approval process is relatively simple, it is not a guaranteed journey. If traditional mortgage pre-approval isn’t feasible, Alpine Credits offers home equity loans that leverage your property’s value rather than your income or credit score. This solution lets you:
- Access up to 75% of your home’s equity.
- Avoid strict income requirements.
- Use funds for more purposes such as debt consolidation, renovations or a down payment.
Interested in a fast, flexible funding solution? Speak to a Financial Solutions Specialist at Alpine Credits for a free, no-obligation quote today.