Mortgage Pre-approval – FAQs

1) It gives you a ballpark estimate of the amount of money you can expect to borrow from a mortgage lenders when you have an accepted offer to purchase. It often happens that the amount people might qualify for is quite different from the result they desire.

2) The pre-approval also allows you to hold an interest rate while you are shopping for a property.

Rates vary without much notice. The pre-approval holds a rate for you which you can discard later if we can do better, but which might prove handy if, in the interim, rates increase higher than your pre-approval rate.

3) The pre-approval rate hold is a form of rate insurance, and is good for 120 days. This protects you against rising rates during that period, while still keeping your options open to go lower.

You need to contact your mortgage broker (or banker) and explain what you are looking for. That you are home shopping and need to know your borrowing power. They will ask of you all the information they need to build an application which can be sent to lenders.

Expect to produce your proof of income and employment, as well as your ID and your proof of down payment. And you will give your consent for your broker to access a copy of your personal credit history.

This is all assembled and a purchase price ceiling is determined, based on debt service ratio guidelines, and other lender guidelines.

Some lenders will issue an actual pre approval certificate – these are more meaningful than simple rate holds.

The most important thing you need to know BEFORE you start home-shopping is what you can afford. Importantly, what you can afford isn’t just the purchase price of your new home, but what you are comfortable spending each month. When you add up the mortgage payment, the property taxes, utilities, condo fees and home maintenance at what point do you scream “that’s enough!”

In addition to the purchase price and what your total monthly costs will be, there are also one-time closing costs that need to be budgeted for. And, when you add this all up, unless you are independently wealthy, most people will require a mortgage which means you need to have a pretty accurate idea how much money a lender is willing to give you before you make an offer.

Unless you’ve considered and planned for all these things, you won’t know what price range you can target, and it’s easy for your eyes to be bigger than your wallet.

Here are just a couple of reasons why you might:

* suppose the pre-approval rate at your bank for an investment property is 5.34% (fixed rate)

That is pretty good relative to the pre approval rate for an owner occupied home. It’s almost the same. But this can change so why not protect against adverse changes by holding that rate for 120 days

* And even though you are an uber strong borrower, when it comes time to make offers, the sellers do not know you. If your realtor can present a pre approval certificate for MORE than the actual purchase price, this ensures your offer will be taken very seriously.

A pre-approval is granted based on your financial, employment, credit and life circumstances at the exact moment in time you asked. It stands to reason that if something significant changes between then and the time you actually make an offer to purchase, your approval could very well fly out the window!

But we still see this sort of thing all the time. I guess no one is telling prospective home buyers this hugely important fact.

Mortgage lenders often wait to confirm employment in the last week prior to closing. This turned out to be a disaster – she was not able to close and now is being sued by the seller.

Other times we meet buyers who take out a new car loan or lease after they are pre-approved. This changes their Total Debt Service Ratio (TDSR), and may make the difference between remaining approved or being disqualified.

If you already have a fixed-rate mortgage, nothing changes – at least not until your renewal date. At that time, you may be in for a surprise with higher payments than you currently enjoy. If this is something you want to get ahead of, you may want to consider some refinance options now, while rates are low.

If you are in a variable-rate mortgage, you will experience changes as they occur. In other words, every time the Prime Rate changes, this will affect the amount of interest you must pay on your mortgage. The majority of variable-rate mortgages see the payment adjusted as soon as there is a Prime Rate change. 

If you are pre-approved for a fixed-rate mortgage, you may find yourself in a very fortunate situation when rates start to increase because, as long as your mortgage funds within the 120 days your pre-approval is valid, your mortgage lender will honor your pre-approval rate!

Some lenders, however, offer variable-rate mortgages where the payment remains constant throughout the term of the mortgage. That can cushion the blow to your monthly cash flow – at least until your renewal date. In this scenario, where the payment remains the same, if rates rise, more money will go towards interest and less towards principal. The opposite is true, of course, when rates fall.

Mortgage lenders will assess affordability for you too – they follow precise measuring guidelines to determine how much of a mortgage you are qualified to carry. Their method is pure arithmetic – they remove the emotion from the calculation. They calculate two very important ratios.

1. Your GDSR (Gross Debt Service Ratio). This is the sum of your mortgage, taxes. heating bill and half of your condo fees, if applicable, as a percentage of your gross income.
2. Your TDSR (Total Debt Service Ratio). Includes ALL your other monthly debt obligations (credit cards, student loans, car payments etc.) combined with your housing costs as a percentage of your gross income.

Gross Debt Service Ratio (GDSR)

This refers to principal, interest, property taxes, and heating costs – in short, the costs of owning your home. If applicable, fifty percent of condo fees are added to this equation. To figure out our GDSR, we will take the household’s gross income (how much money you make from all income sources before any taxes are taken off) and divide these home ownership costs by that number.

Most lenders want your GDSR to be at or under 39%. For example, if you are looking to get a $1,000-per month mortgage payment, and your heating bill is $1,800 per year, while you pay $3,000 in taxes, then your cost (for mortgage purposes) for the year is $16,800.

You would have to earn at least $52,500 per year in order for lenders to consider you for this hypothetical home under most circumstances.

Total Debt Service Ratio (TDSR)

The second rule of thumb is your entire monthly debt load should not be more than 44% of your gross monthly income. Basically, the lender will take the number you used when you figured out your annual housing costs (PITH) and add any other debt that you have. This includes any car loans, credit card debt, alimony, child support, and any other loans.

If you spend 39% of your gross income on housing costs, you will have to sacrifice in other areas in your life. It’s just basic math.

You likely won’t have much breathing room to throw at worthwhile goals like retirement savings, RESP contributions, vacations, or small luxuries. (This isn’t even accounting for higher interest rates or unexpected job loss.)

Give yourself some breathing room and don’t tempt yourself by shopping for homes well outside of your true affordability range.

You can do some rough numbers yourself, but the only way to be sure what your limits are is to get a mortgage pre-approval. And, you should get pre-approved long before you actually think you might want to buy a house.

Start talking to your mortgage broker early in the process. They will help you to identify all the things you need and get you an answer about the maximum mortgage you are qualified for. Getting pre-approved means you’re CONDITIONALLY approved for a mortgage – up to a certain limit – in advance of actually buying a house.

We emphasize CONDITIONALLY, because it’s important to remember that pre-approval is not a guarantee — it’s simply saying what you are able to afford and the maximum that a lender will give you if everything checks out.

In fact many lenders do not even review pre-approval applications. They simply hold a rate for you! So please do NOT fall in love with yourself just because you have been pre-approved. Another important thing missing from the equation is the actual house or condo that you want to buy. For a final mortgage approval, lenders also need to assess the property, including such things as its true appraised value, whether there are problems with the land or building infrastructure and many other factors.

Yes, it absolutely is worthwhile. There are always a lot of questions around mortgage pre-approvals.
If you are pre-approved for a variable-rate mortgage, your payment will be affected by changes to the Prime Rate. This is something you cannot avoid.

BUT the rate for a variable-rate mortgage is expressed as a discount to the Prime Rate – and THAT is something that could change quickly during your pre-approval period.

Today, it is reasonably easy to get a five year insured fixed rate mortgage at 4.89%.

Your pre-approval will lock in that rate for 120 days regardless of whether the Prime Rate increases, or if government bond yields go wacky.

If rates go up during the 120 days you will be happy you protected against this and if rates decline we can throw away the pre approval rate and secure a better, lower rate for you.

Although these pre-approval calculations are theoretically what you can afford, lenders also care about your track record of paying your bills and debts on time consistently, each and every month. If your credit score is too low, lenders will be less willing to take a risk on you, the interest rate you’re offered could be higher, and the maximum amount you can borrow will be lower.

We strongly recommend practicing good credit hygiene to ensure your credit score is as high as it can be before you start looking for a house.

As part of the pre-approval process, most lenders will want to do a hard inquiry of your credit score. An experienced mortgage professional can review your personal copy of your credit report, together with all the documents a lender is going to ask for and will be able to offer a very strong opinion on what you will qualify for.

Once you’re pre-approved it does guarantee that the mortgage rate offered won’t change during the 120 day mortgage pre-approval period with us. By locking in your rate, you are protected if interest rates rise while you’re out house hunting. In the case that interest rates go lower during this time, we will honor the lower rate.

The time to negotiate hard for your mortgage interest rate is when you have an accepted offer to purchase, and you have applied for a mortgage. At that time, every one takes you seriously. This is no longer a what-if discussion but it’s the “real deal”.

But at the pre-qualification or pre-approval phase, no lender will discount their rate for you. And in fact, many lenders have pre approval rates which are higher than their normal rates!

Any time someone accesses a copy of your personal credit report it may have a very small, negligible impact on your score. For most people it would be between zero and ten points. For most people, this is unlikely to change anything. And besides, like the old saying “no tickee, no laundry!”

There is no cost for the pre-approval.

When you consummate the purchase of your home, you will have normal closing costs. They are outlined in this article https://askross.ca/top-10-things-your-home-buying-budget-needs-to-include-in-addition-to-the-purchase-price/

When we receive an approval, the lender will indicate whether or not they require an appraisal done on the property. The cost varies, especially by location. In Toronto, properties under a million should cost less than $400. We typically share the cost with our clients as a show of goodwill.

As to other specific costs arising from your mortgage that is mostly between you and your real estate lawyer who will charge you a fee to register the mortgage, purchase title insurance, accept monies from the lender and various other tasks. All reputable lawyers have a well defined cost for these services.  As brokers, and for the A-lenders we represent, there are no other incremental expenses.

A variable rate mortgage is priced typically at a discount to the lender’s Prime Rate. It is the discount specifically which is the rate hold.

If the Prime Rate has increased since you were pre approved then yes your pre approval rate changes. It is a VARIABLE rate mortgage after all!

Rates vary without much notice. The pre-approval holds a rate for you which you can discard later if we can do better, but which might prove handy if, in the interim, discounts shrink further than your pre-approval rate. The pre-approval rate hold is a form of rate insurance, and is good for 120 days.

There is no cost for the pre-approval.

When you consummate the purchase of your home, you will have normal closing costs. They are outlined in this article https://askross.ca/top-10-things-your-home-buying-budget-needs-to-include-in-addition-to-the-purchase-price/

When we receive an approval, the lender will indicate whether or not they require an appraisal done on the property. The cost varies, especially by location. In Toronto, properties under a million should cost less than $400. We typically share the cost with our clients as a show of goodwill.

As to other specific costs arising from your mortgage that is mostly between you and your real estate lawyer who will charge you a fee to register the mortgage, purchase title insurance, accept monies from the lender and various other tasks. All reputable lawyers have a well defined cost for these services.  As brokers, and for the A-lenders we represent, there are no other incremental expenses.

There are still risks associated with firm offers. Here is sample wording from one of Canada’s top banks about their pre approval.

“Good day, Thank you for the application and support of our bank; pre-approval commitment is enclosed. RATE HOLD ONLY***Final approval is subject to meeting our bank’s lending guidelines for property eligibility, credit history, employment income (with confirmation income is not impacted by COVID-19) and down payment verification before closing. “

Suppose you are buying with less than 20% down payment. Your applicancy may be strong as far as high ratio deals go, but one potential concern buying in a declining market is if the insurer perceives the price was too much and requires an appraisal AND if the appraisal comes in lower than purchase price. You may have no extra funds to cover such a shortfall.

If you have at least 20% down payment AND you have a decent amount of extra $$ you could use if an appraisal comes up short, then you may be okay. By no means a sure thing though.

If you are offering with a condition of financing, 48 hours should suffice for us to find out where you stand. If no appraisal is required then we can be approved within 48 hours. If an appraisal is required they will tell us …..and an extension would be needed.

Trigger Rate applies to variable rate mortgages with static payments. They comprise the majority of variable mortgages. As the Prime rate increases, your fixed payment is paying down less and less principal with each payment. And if the rate gets high enough to the point where there is no principal being repaid, then you have hit negative amortization and reached your personal Trigger Rate. It is unique to you and varies from person to person.

Here is our calculator which will help you estimate your own Trigger Rate.