Mortgage pre-approval in Canada: how it works

The short answer

A mortgage pre-approval is a lender's review of your income, debts, down payment and credit, ending in the maximum it may lend you and, usually, a rate hold. A pre-qualification is a quicker estimate based mostly on what you tell the lender. Neither one is a final mortgage approval. The final approval comes only after you have an accepted offer on a specific home and the lender has checked the property.

The Financial Consumer Agency of Canada (FCAC) notes that lenders use these terms loosely: some call a pre-approval a pre-qualification or a pre-authorization. What matters is what the lender actually checked. Ask whether it pulled your credit and reviewed your documents.

Estimate, pre-qualification, pre-approval, final approval

An affordability calculator is the right first step: it's private, instant and uses the same rules a lender does. A pre-approval adds a lender's check of your real documents and credit. That matters most when you're ready to make offers.

How much can I get pre-approved for?

A lender pre-approves the largest mortgage that keeps your GDS ratio at or below 39% and your TDS ratio at or below 44% (the insurer limits), tested at the stress-test rate: the greater of your rate plus 2 points or 5.25%. Your down payment must also meet the minimum for the price.

Example: $100,000 of household income, $50,000 down, $400 a month of other debts, a 4.12% rate (tested at 6.12%), 25 years, in Ontario. That supports a home of about $477,500 with a $440,753 insured mortgage. The table shows how income and debts change the estimate.

Small debts may not change the estimate. When housing costs (GDS) are the tighter limit, debts only start to cut the maximum once they pass about $417 a month for this income, the gap between the 44% and 39% limits. Above that, every dollar of monthly debt payment lowers what you can borrow.

These are estimates using insurer limits. Lenders can apply stricter limits of their own, especially on uninsured mortgages, and they decide how to count variable income such as bonuses, commission or self-employment income. The pre-approval amount is a ceiling, not a target. Many buyers choose to shop below it.

Rate holds

Most pre-approvals come with a rate hold: the lender promises to honour a rate for a period while you shop. The FCAC says a rate can be held for 60 to 130 days, depending on the lender. The length, the conditions and what happens if rates fall are all set by each lender, so ask:

• How many days is the rate held, and does the hold run to the closing date or to the date you get final approval?
• Is the held rate guaranteed, or only an estimate?
• If rates drop before closing, will I get the lower rate?
• Is the hold for a specific term and product, such as a five-year fixed?

A hold matters because the stress test moves with your rate. If the example household's rate rose by 0.5 points to 4.62% before it locked in, its estimated maximum would fall from $477,500 to $460,000, a drop of $17,500.

Documents lenders ask for

The FCAC lists identification, proof of employment, proof you can pay the down payment and closing costs, and information about your other assets and debts. In practice, expect requests like these:

• Identification for every borrower.
• Income and employment: a recent pay stub and an employment letter showing your position, pay and time with the employer.
• Notices of Assessment (NOAs) from the Canada Revenue Agency. The FCAC says self-employed borrowers may be asked for the past two years. Lenders may also ask salaried borrowers for NOAs, especially when income includes bonuses, commission or overtime.
• Down payment history: recent bank or investment statements showing the money in your accounts. Lenders want to see where it came from, so large deposits may need an explanation. Statements for an FHSA or RRSP you plan to use count here.
• Gift letter if a relative is giving you part of the down payment, confirming it does not have to be repaid.
• Debts and other assets: car loans, student loans, lines of credit, credit cards, support payments, and any other property you own.

The credit check

For a pre-approval, a lender will likely pull your credit report. That's a hard inquiry, which appears on your report and can affect your score. A lender can refuse a mortgage because of poor credit history.

For an insured mortgage (less than 20% down), CMHC requires at least one borrower or guarantor to have a credit score of at least 600. Sagen uses 600 for at least one applicant above 80% loan-to-value. Canada Guaranty does not publish a number. Lenders may want more than the insurer minimum, and uninsured lenders set their own credit standards.

Before you apply, get your free credit reports from Equifax and TransUnion and fix errors. Pay every bill on time while you shop.

After your offer is accepted

The pre-approval is conditional. Once you have an accepted offer, the lender re-checks you and checks the home. In Canada it's common to make an offer conditional on financing so you have time for this. Typical steps:

• Property check or appraisal. The FCAC notes that the lender will verify the property meets its standards, and that the approved amount depends on the property's value and your down payment. If the home is valued below the price, you may need more cash.
• Insurer approval. With less than 20% down, the mortgage insurer (CMHC, Sagen or Canada Guaranty) must also approve the loan and the property. The price must be under $1,500,000.
• Updated documents. Fresh pay stubs, statements or an updated credit check if time has passed.
• Condo documents for a condo, such as the status certificate in Ontario, so the lender can see fees and the building's finances.
• The commitment letter. The lender's written approval, with its own conditions to meet before closing.

Avoid big changes between pre-approval and closing. A new car payment of $600 a month would lower the example household's estimated maximum from $477,500 to $397,500. Changing jobs, missing payments or moving your down payment money around can also cause problems.

How to get pre-approved

1. Estimate your budget with the affordability calculator and the closing costs calculator, so you know the cash you'll need beyond the down payment.
2. Check your credit reports and fix errors.
3. Gather ID, pay stubs, an employment letter, NOAs and down payment statements.
4. Apply with one or more lenders or a mortgage broker. Compare the amount, the rate, the hold length and the conditions.
5. Read the pre-approval: note the expiry date, the rate and every condition listed.
6. Shop within a budget you're comfortable with, and make offers conditional on financing.