What is a Mortgage Pre-Approval?

Short Answer: A pre-approval in Ontario is when you qualify for a specific mortgage amount and interest rate from a lender.

With a mortgage pre-approval in hand, you can confidently put offers in on homes. Your realtor will know what price range to show you and you’ll be able to make quick decisions about how much to offer on a house you like.

But pre-approvals (sometimes referred to as pre-qualification) aren’t a commitment. The lender will lock in the interest rate, but the actual mortgage amount you’re qualified for may change for various reasons.

So why get a pre-approval at all? Let’s dive in…

Why do I need to get pre-approved?

1. Speed. When you make an offer on a house and it is accepted, it won’t take as long to get an actual commitment letter from a lender because we’ll have all of your documentation ready.
2. Confidence. You’ll have an actual mortgage amount from a lender. Even though it’s not set in stone, that’s way better than making blind offers on houses, not knowing how much you qualify for.
3. Rate Lock. The lender guarantees you an interest rate in the pre-approval letter and locks that rate in for 90-120 days. That can save you hundreds of thousands of dollars over the course of your mortgage when interest rates are rising.

What is the difference between a pre-approval letter and a commitment letter?

Pre-approval is the lender qualifying you as the borrower based on your current financial situation.

With a pre-approval in hand, you can confidently make offers on houses. Once you have an accepted offer, now you need to submit that offer to the lender. The property has to be approved as well.

If everything lines up, the lender will send you a commitment letter. This is the foundation of your mortgage contract. Once you sign a commitment letter from a lender, you can remove your financing condition.

Be careful, though, commitments are conditional upon many things. The biggest condition is that your financial situation stays the same. So if you take on more debt, lose your job, or lose some of your down payment money, the lender can back out of the commitment.

How do you get a mortgage Pre-Approval in Ontario?

Contact a reliable mortgage broker *cough, cough* 🙂

• Fill out a mortgage application
  • This is literally a regulatory requirement. Plus it’s the easiest way to get all the details I need to start your pre-approval process.
• Get your documents to the mortgage broker ASAP
  • Once you’ve filled out the mortgage application, we need to confirm all of those details. Lenders ask for specific documents, like pay stubs, T4s, proof of down payment and much more. I already know what most lenders ask for, so we get all of that taken care of up front.
• Broker underwrites the file (not always) and submits to lender
  • Based on the details you gave me in the mortgage application and from your documentation, I run numbers and come up with a mortgage amount I feel is appropriate for your financial position. Then I find a lender that fits you and submit your information to them, asking for a pre-approval.
• Lender sends a pre-approval if approved
  • You get a letter (or sometimes just an email) from the lender with your approved mortgage amount and interest rate. Then you can go house shopping with your favourite realtor. If you don’t have a realtor yet, I’ll recommend a few that I deeply trust.

How long does a pre-approval last for?

When you get the pre-approval letter from the lender, it will say how long that “rate hold” is good for.

If interest rates are on the rise, a rate hold will save you hundreds of thousands of dollars over the course of your mortgage. 

Most pre-approvals are good for 120 days, but make sure you’re clear on your “rate hold period” as stated on the pre-approval letter.

Why am I approved for less now than I was 6 months ago?

Remember, most pre-approvals are only good for 120 days (4 months-ish). Once that approval expires, we have to resubmit your file to the lender. If anything changed in interest rates, real estate prices, and most importantly, your financial situation since the first approval expired, then you’ll qualify for a different mortgage amount. 

Here are 3 factors that most affect your mortgage approval amount:

• New debt. If you bought a car, leased equipment, or made any major purchases on credit, that increases your debt to income ratio. Higher debt to income ratio means less mortgage amount.
• Lower income. If your income isn’t the same as it was, that also affects your debt to income ratio. Less income means less mortgage amount.
• Higher interest rates. This isn’t something you control, but it will affect your approval amount. Higher interest rates means more being paid to interest on each payment and less to principal and you qualify for a lower mortgage amount.
  • A real bully here is the stress test. You aren’t qualifying at the interest rate the lender offered you. As of November 2022, you’re qualifying at the “contract rate” (the rate they offered you) +2%. So if you were offered 5.55%, you’re qualifying at 7.55%.

Important mortgage pre-approval tips

1. Keep your debt to income ratio low.
2. Don’t add new debt (car purchase, equipment lease, major credit purchase) once you’re approved.
3. Make offers that are $10,000 – $20,000 under your approved amount.
4. Know what your closing expenses will be.
5. You as the borrower are approved, but the property isn’t yet. Lenders will still need to examine the property.

How do I start the pre-approval process?

It all starts with a mortgage application. Click here if you want to fill one out online.

Or you can apply over the phone, call 705-358-5635.

And feel free to call, text or email your questions to funded@joelarndt.ca.

Happy house hunting!

Joel Arndt
Mortgage Agent
Sherwood Mortgage Group #12176

P.S. If you need to see the numbers for yourself, you may enjoy “My Mortgage Planner App.” Download the app, create a profile, then start messing around with different scenarios to see what your options are.

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