The important points
- Mortgage pre-approval is a good first step for prospective home buyers, in which a mortgage lender tells them how much they’ll be able to borrow.
- Pre-approval is usually straightforward, as long as the applicant has all of their documentation ready.
- A pre-approval isn’t a binding loan agreement; the lender could still decline the final application if details have changed or if the purchased home doesn’t meet their requirements.
What is a mortgage pre-approval?
Mortgage pre-approval is the first serious step in securing a mortgage to buy real estate. A mortgage lender takes a detailed look at your financial situation and tells you how much money they’re willing to lend you for your mortgage.
“Basically, a pre-approval is a promise to lend money to the individuals to purchase a property,” said Eitan Pinsky, Owner and Mortgage Expert at Pinsky Mortgages. “The pre-approved mortgage amount is set and a home buyer can borrow up to that amount.”1
While it includes a firm dollar figure, pre-approval isn’t a binding loan agreement. The lender could still deny the final application if the chosen property doesn’t meet its standards.
“The only thing that a pre-approval has not checked is the property,” said Pinsky. “[The mortgage] will be underwritten and approved of once a specific property is being purchased.”1
Nevertheless, pre-approval is a wise step for first-time home buyers. It has four key benefits:
- Establishing a budget. You’ll know the maximum mortgage amount you qualify for. This allows you to set a realistic budget and limit your search to properties you can afford.
- Estimating payments. You’ll have an estimate what your future monthly mortgage payments will be. This, again, helps you budget for your home purchase.
- Locking in an interest rate. Lenders will often guarantee a specific interest rate for a set period — typically 60 to 130 days.2 This protects you if rates rise while you are house hunting. As a bonus, if interest rates drop during that time, you can usually still negotiate for the lower rate.
- Making stronger offers. Once you’re pre-approved, you’ll have a pre-approval letter to show to home sellers. This shows that your offer is legitimate and that you have the financial backing to close the deal.
Bear in mind that pre-approval isn’t the same thing as pre-qualification — another term you’ll likely hear during your home search journey.
Pre-qualification vs. pre-approval
Pre-qualification is like a lighter, less comprehensive version of pre-approval.
“A pre-qualification is a calculation based on income, ongoing monthly obligations, and expected property costs,” said Pinsky. “The pre-qualification tells a homebuyer their potential purchasing power. A pre-qualification can be done in just a few minutes with a few pointed questions and it is pretty straightforward when it comes to salaried individuals.”1
Pre-qualification involves less paperwork than pre-approval.
“No upfront documents are required. However, pre-qualifications can be a little more challenging for self-employed individuals or variable income earners, and income documentation is generally needed,” said Pinsky.1
Once you’re pre-qualified, you’ll have a useful estimate of how much you can borrow. Pre-qualification is quick and easy — a great first step for home buyers.
What do you need to get pre-approved?
To get pre-approved, get in touch with a mortgage lender or broker. A lender is the company underwriting the actual loan; a broker is an intermediary who can shop around on your behalf with multiple lenders.
There are many ways to choose, whether you go with a broker, a big bank, a credit union, or another type of lender. Certainly, you want the lowest possible interest rate and agreeable terms. But, you also want to deal with someone trustworthy and helpful. Choosing a mortgage and a lender is a topic all to itself.
You can get pre-approved with multiple lenders, but it’s not usually necessary.
“In general, a pre-approval at one lender is going to be quite similar at another lender,” said Pinsky. “However, if [the borrower’s] income or credit are not straightforward, it might be prudent to get multiple pre-approvals in the event that one lender, for example, does not recognize a portion of the income, whereas a different lender would. In this case, the pre-approved mortgage amounts would be different.”1
Documents required for pre-approval
To get pre-approved, you’ll usually need to provide the following documentation:
- Personal identification, such as a driver’s license.
- Proof of employment and income, such as recent pay stubs, length of time with your employer, or notices of assessment if you’re self-employed.
- Details of your bank accounts, assets, and current debts, including credit cards, child support, car loans, and student loans.
- Proof that you have the funds to cover your down payment and closing costs.
There may be other requirements depending on your personal situation, such as residency certificates for temporary residents or mortgage statements for those who already own another property.
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How long does pre-approval take?
“Lenders generally take two to three business days to underwrite pre-approvals,” said Pinsky.
However, it might take longer in some situations.
“Delays are generally caused by lender backups, [such as] too many pre-approvals sent to the same lender at once by various brokers,” said Pinsky. “Or, incorrect or ambiguous application information. For the latter, it’s generally because the mortgage professional taking a home buyer’s application submitted incomplete information, which a better client intake process can solve.
“Lastly, insufficient documentation from a home buyer will delay the pre-approval process too.”1
How to avoid delays and speed up the process
You can speed up the mortgage pre-approval process with two simple steps:
- Have all your documentation ready to go. On the applicant side, the process depends on you providing the required documents quickly. Be ready to respond if the lender asks for additional input.
- Apply online. Many lenders offer online mortgage applications. With these, you can apply in minutes with no need to visit an office in person.
Once you’ve given the lender everything they need, delays can still spring up. If you’re not in a rush, maybe that’s no problem. But if you make an offer on a house that’s accepted, you definitely don’t want the mortgage approval process holding things up.
Here are some basic tips to avoid common delays in pre-approval and approval:
- Don’t apply for new credit. Avoid making large purchases on credit, such as financing a car or a wedding. Any new debt or changes to your credit report can prompt a lender to withdraw their offer, which could delay closing on the home by weeks.
- Maintain your current employment. Lenders prefer a stable job history, so don’t change jobs or switch from full-time to part-time work in the weeks leading up to buying a home. Oh, and don’t get yourself fired, of course.
- Review paperwork carefully. Check your loan documents, disclosure forms, and other paperwork for errors. Ask questions if you don’t understand something.
- Sign documents early. Aim to sign your mortgage documents two days before the closing date. Ensure that your lender delivers the completed documents and instructions to your lawyer before the deadline.
Mortgage pre-approval and credit scores
Getting a mortgage pre-approval will have a minor, temporary effect on your credit score.
“A pre-approval requires a credit check to verify a borrower’s credit score and creditworthiness,” said Pinsky. “This credit check is called a ‘hard’ check, which signifies to the credit company that a potential borrower intends to apply for a loan. The hard check can decrease someone’s credit score but it generally only goes down by a few points.
“Generally, credit checks do not meaningfully impact a person’s credit score. If the score decreases at all, it usually recovers within a few months.”1
If you want to compare multiple lenders, don’t worry; multiple credit checks of the same type in a short timeframe won’t compound the effect on your credit score. Typically, credit inquiries of the same type during a period of 14 to 45 days will be grouped together as a single hard check.3
Be wary of too many credit checks of varying types, however.
“Checking credit at a bank and a broker is not a problem,” said Pinsky. “However, if a home buyer checks their credit at two banks, a broker, a currency exchange, two car dealerships, and then a payday loan corporation, the credit score will decrease significantly.
“Checking credit many times is called ‘credit seeking behaviour,’ and this can materially decrease a credit score.”1
Pre-qualifications involve only soft credit checks, which don’t affect your credit score.
Tip: to minimize the impact on your credit score, group your applications as closely together as possible, and avoid credit checks for other types of loans during this time.
