November 6, 2023 nkad3

Why Do I Need a Mortgage Pre-Approval?

At face value, it might seem self-explanatory, yet we often get asked: What is a mortgage pre-approval, and why do I need one?

People are right to ask though and that’s because there is some ambiguity behind mortgage pre-approvals in Canada. What is a mortgage pre-approval? What can I do with it? Do I need to worry about financing, even with a mortgage pre-approval in hand?

We answer by first saying that a mortgage pre-approval is a great ‘starting point’, for all intents and purposes, but is not intended to be depended on solely when making important mortgage-related decisions.

Confused by this? We don’t blame you. Let’s explain further…

What IS a mortgage pre-approval?

  • A mortgage pre-approval is a financial assessment of your maximum affordability calculated using variables such as income, credit score, debt ratios, current market rates (or pre-approval rates), etc.
  • It often comes in the form of a formal bank or brokerage letterhead stating the important pre-approval details allowing you to search the market for properties with a much higher level of confidence.
  • They typically confirm a specific approval interest rate being offered, the duration of that rate hold (ex. 90 days, 120 days, etc.), and standard terms and conditions for financing fulfillment.
  • Mortgage pre-approvals are offered for purchases (both insured or uninsured), but not for refinances or mortgage switches/transfers.
  • Your two biggest takeaways from the mortgage pre-approval will likely be:
    • Your maximum affordability
    • The rate being held for you, and for how long.

What is a mortgage pre-approval NOT?

  • A mortgage pre-approval is not a binding contract or firm mortgage approval. Ultimately, this means the bank providing the pre-approval can withdraw their interest at any time using their discretion.
  • A mortgage pre-approval is just the start of the mortgage process. During the pre-approval stages, the most important steps in the approval process still need to take place (ex. verbal employment verification, in-depth review of income documents, appraisals, etc.)
  • Pre-approvals are not approved by the mortgage default insurer (if you are putting less than 20% down) who ultimately gives the final approval on financing.
  • Although often leveraged for this reason, a mortgage pre-approval is NOT intended to be used to forego a condition for financing in your offer. The act of foregoing conditions for financing is done at the sole discretion of the buyers (we cannot stress this enough).

To sum up in 3 points – What is a mortgage pre-approval best used for?

  1. To determine your maximum affordability or purchasing power (to ensure you are purchasing within your limits)
  2. To enter the real estate market with more confidence (with knowledge on the rate, mortgage payment, amortization, affordability, debt ratios, etc.)
  3. To familiarize yourself with financing conditions that need to be met (examples, but not limited to letter of employment, pay stub, business license, articles of incorporation, notice of assessment, T1 generals, etc.)

If you need a mortgage pre-approval to get started in 2024, we offer that service and guidance. We’ll make it easy for you and will ensure you enter the market with confidence.

Call us today at (905) 455-5005.


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