Before starting your house-hunting journey there is one very important step you’ll need to take, getting pre-approved for a mortgage. We know that as a first-time homebuyer this may all be very new to you, but no worries, this article is going to break it down step-by-step.

What is a mortgage pre-approval?

A mortgage pre-approval means that a lender (bank, mortgage broker, etc.) has approved and stated that you are eligible for a loan of a certain amount of money (your mortgage) based on your personal financial information. A pre-approval will tell you how much money you are able to borrow to purchase your new home. In Ontario, and dependent on where you borrow your money from, mortgage pre-approvals are valid typically anywhere from 60-130 days. A mortgage pre-approval is a written contract and financial analysis based on your information that is put together by the lender of choice (bank, mortgage broker, etc.). It is important to note that, getting pre-approved is a very useful and crucial step in the homebuying process, but it does not guarantee that you will receive the mortgage.

A pre-approval is not to be confused with pre-qualification. Pre-Qualification is a great option if you’ve maybe only just started to think about buying a home and don’t necessarily plan on purchasing but still want to have a general idea of what you’d be eligible for. This will give you a number to play around with as you continue to think if this is the move (literally) for you. A pre-approval is a much more serious step in the home buying process.

Why do I need to get pre-approved?

It determines your budget: This will let you plan and determine how much you want to and can spend on a home. It allows you to calculate your monthly mortgage in advance – this is also great for future forward planning.

It locks in an interest rate: For example, if your pre-approval was valid for 60 days, with that you are locking in that interest rate as well for 60 days. Locking in an interest rate is in your best interest as this protects you from any interest rate increases.

Tells a seller you mean business: Having this pre-approval puts you in an upper hand position and tells a seller that you are a serious buyer. This also lets the seller know that you have the financial means to see the transaction through. Which is going to be in your favour when a seller sees this.

Where do I get pre-approved?

When it comes to getting your pre-approval there are multiple options. You can go with a direct lender (a bank/financial institution), or you can opt for a mortgage broker.

Mortgage Broker: A mortgage broker is an intermediary who helps buyers find a lender that will best benefit them and their unique circumstances. Mortgage brokers can help you shop around and compare different loan/interest options. Choosing to go with a mortgage broker can take some stress off figuring it all out yourself and can really find an option that caters to your unique needs. If you’re interested in going with a mortgage broker a great place to start is by connecting with friends and family to see if they have someone they trust and can recommend.

Direct Lender: A direct lender is a bank or financial institution where you would directly borrow money from. There is no intermediary bringing it all together like there is with the mortgage broker. Opting to get pre-approved with a direct lender cuts out the middle person (the mortgage broker) and can speed up the process. If you’re considering going to a direct lender start with where you do your personal banking and see what their application process looks like. Or, if you have a direct relationship with someone at your bank or financial institution it may be worth going in and speaking to them directly about your next steps or connecting you with a colleague that can help you directly.

There is no right or wrong option when it comes to deciding how to go about getting pre-approved. Both come with their own set of pros and cons, so it’s wise to do your research to see which option best suits your needs.

What do I need to do to get pre-approved?

Be prepared to share the following information and documents with your mortgage broker or bank:

• Your assets: what you own (cash, car, boat, etc.)
• Your income: lenders will be looking for a stable income to ensure monthly mortgages can be paid
• Your level of debt/any other financial obligation, including:
  • Child or spousal support
  • Car loans
  • Student loans
  • Credit card balances
  • Line of credit
• Legal form of identification
• Proof of employment
  • Salary or hourly rate
  • Position in company
  • Length of employment
  • If you are self-employed, you will require notices of assessment from the Canada Revenue Agency for the past 2 years
  • Letter from employer
• Your credit scores
• Recent financial statements: If you opt for a mortgage lender, they may require this to ensure that you have the necessary down payment, closing costs etc.

Questions to bring with you to a broker or lender

When going through the process of getting pre-approved these are some good questions to have in your back pocket to ask your broker or lender to make sure you really understand what’s going on and you feel comfortable moving forward with this option:

• How long do they guarantee the pre-approved rate for?
• How long should the process of getting approved take?
• Is there an option to get the pre-approval extended if needed? What does that process look like?
• Are there any potential risks with this that I should be aware of now?
• What is the penalty for breaking the mortgage?

If there is anything else throughout the process that you don’t understand, don’t hesitate to ask. Mortgage brokers and bankers are in this world 24/7 so it can be easily assumed that something is common knowledge, when in fact, it really isn’t. And remember, this is also the biggest investment you will likely ever make, so ensuring that you both understand and are comfortable with the process is crucial. Buying a home can be stressful enough, don’t let any confusion or unclarity about the process add to that load.