Getting Pre-Approved for a Mortgage: What Buyers Should Know

For many home buyers, getting pre-approved for a mortgage is one of the first practical steps in the buying process.

It can help you understand the price range you may be able to consider, give you an idea of what your mortgage payments could look like and make your home search more focused.

But there's an important distinction that buyers sometimes miss:

A mortgage pre-approval is not a guarantee that your mortgage will ultimately be approved.

Understanding what a pre-approval does—and what still has to happen after you find a home—can help you approach your search with more realistic expectations.

What Is a Mortgage Pre-Approval?

A mortgage pre-approval is an assessment completed by a lender or mortgage broker before you've chosen the property you want to buy.

As part of the process, you'll generally provide information about your income, employment, debts, assets and the money you expect to use toward your purchase. A lender will also likely check your credit. Canada

Based on that information, the process may give you an indication of the maximum mortgage amount you could qualify for and an estimate of your payments. Depending on the lender, it may also include an interest-rate hold for a specified period. Canada

That's useful information to have before you begin seriously looking at properties.

But the amount you're pre-approved for should be treated as a financing limit, not necessarily your home-buying budget.

How Much Should You Actually Spend?

Being told you may qualify for a particular mortgage doesn't mean you have to spend that much.

A lender's calculation is primarily concerned with whether you meet its lending requirements. Your personal budget has to account for everything else competing for your income.

That can include:

• Property taxes

• Home insurance

• Heating and electricity

• Water and wastewater costs

• Maintenance and repairs

• Transportation and commuting

• Other debts and monthly obligations

• Savings and retirement goals

• The lifestyle you want to maintain

You may decide that buying below your maximum qualification gives you more financial flexibility.

This is particularly worth considering when comparing Nova Scotia properties because two homes at similar prices can have considerably different operating and maintenance costs.

What Will a Mortgage Professional Need From You?

The exact requirements vary by lender and by your financial circumstances, but you should expect to provide documentation supporting the information in your application.

That may include:

• Identification

• Proof of employment and income

• Information about your bank accounts and other assets

• Details about loans, credit cards and other debts

• Information about your down payment

• Evidence showing where your down payment is coming from

• Documentation showing you have funds available for closing costs

Self-employed buyers or buyers with income that doesn't fit a conventional employment arrangement may be asked for additional documentation.

Providing complete information at the beginning can help avoid unnecessary delays. CMHC notes that missing or incomplete information is a common reason mortgage applications take longer to process. Canada Mortgage and Housing Corporation

Your Down Payment Is Part of the Conversation

Your mortgage professional will want to know not only how much money you have available for your down payment, but also where it came from.

Depending on your situation, those funds might come from savings, investments, proceeds from selling another property or an eligible gift.

Documentation requirements can vary depending on the source of the money, so it's worth discussing this early rather than assuming you can simply move the funds when they're needed.

You'll also want to remember that your down payment isn't the only cash you'll require.

Legal fees, inspections, applicable deed transfer tax, adjustments at closing, moving expenses and other purchasing costs may all require funds outside the amount you're putting toward the property.

Pre-Approved Doesn't Mean Final Approval

This is probably the most important thing to understand about mortgage pre-approval.

Your lender hasn't approved the house yet because you haven't chosen it.

Once you have an accepted offer, the lender can assess the actual transaction and property.

The final mortgage amount can depend on factors including the purchase price, the property and its value. A lender may require an appraisal or other information before providing final approval. CMHC specifically notes that even a buyer with a pre-approved mortgage still needs final mortgage approval during the conditional-offer period. Canada Mortgage and Housing Corporation

This is one reason a financing condition can be important when preparing an offer.

A strong pre-approval puts an important piece of the financing puzzle in place—but it doesn't eliminate the remaining pieces.

Why Can the Property Affect Your Financing?

When you're buying a home, the lender isn't evaluating only you.

It's also lending money against the property.

Certain characteristics may cause a lender to ask additional questions or require more information. The exact requirements depend on the lender and the property.

This can become particularly relevant when considering properties that are unusual, require substantial work or don't fit neatly into conventional residential lending.

CMHC notes that lenders verify that a property meets their standards before approving a mortgage and that those standards can vary between lenders. Canada

If you're considering a property that's significantly different from a conventional home, involving your mortgage professional early can help identify potential financing questions before they become time-sensitive.

What Is a Mortgage Appraisal?

An appraisal may be one of the steps a lender uses to assess the property.

The purpose isn't the same as a home inspection.

A home inspection is intended to help you better understand the physical condition of the property. An appraisal is concerned primarily with establishing the property's value for lending purposes.

The lender wants to know whether the property's value reasonably supports the mortgage being requested.

CMHC explains that property value is an important part of determining the mortgage amount and that a professional appraisal may be required when a more detailed valuation is needed. Canada Mortgage and Housing Corporation

If the lender's valuation doesn't support the amount required for the purchase, the buyer may need to discuss the available options with their mortgage professional and REALTOR®.

Try Not to Change Your Financial Situation Before Closing

Getting pre-approved doesn't freeze your financial circumstances.

Your lender may review or verify information again before the mortgage is finalized.

Because of that, it's worth speaking with your mortgage professional before making significant financial changes while you're in the process of buying a home.

For example, taking on new debt, financing a vehicle or making another substantial credit purchase could affect the financial picture on which your mortgage qualification was based.

The same principle applies if something significant changes with your employment or income.

If your circumstances change between pre-approval and closing, tell your mortgage professional rather than assuming it won't matter.

What Should You Ask During the Pre-Approval Process?

A pre-approval meeting isn't just about receiving a maximum mortgage number.

It's also an opportunity to understand how your financing will work.

Useful questions might include:

• How much could I potentially qualify to borrow?

• What might the monthly payment look like?

• How long is the pre-approval valid?

• Is an interest rate being held, and for how long?

• What documentation will you need from me?

• Are there property types that could present financing challenges?

• How quickly can financing be reviewed once I have an accepted offer?

• What could cause final approval to differ from the pre-approval?

• Who should I contact if my income, debts or down payment change?

FCAC specifically recommends asking how long a pre-approved rate is guaranteed, whether a lower rate would apply if rates fall during that period and whether the pre-approval can be extended. Canada

Don't hesitate to ask your mortgage professional to explain anything you don't understand.

Your REALTOR® and Mortgage Professional Have Different Roles

Your mortgage professional and REALTOR® are both important during a purchase, but they provide different expertise.

Your mortgage professional can advise you about mortgage qualification, financing products, interest rates and lender requirements.

Your REALTOR® can help you understand the property, the market and the real estate transaction—and can make sure your mortgage professional receives the property and offer information they need when financing is being reviewed.

Neither replaces the other.

The process generally works best when the professionals involved can communicate efficiently once you've found a property you want to purchase.

Get the Financing Conversation Started Before You Find the House

It's much easier to work through questions about income, credit, down payment or documentation before you're working against the deadlines of an accepted offer.

A pre-approval can give you a clearer starting point and help focus your search on properties that make sense for your circumstances.

Just remember what it actually represents.

It tells you something about your potential financing before you've selected a property. Final approval comes later, once both you and the property have satisfied the lender's requirements.

That distinction is worth understanding before you begin your home search.

Part of the Buying a Home in Nova Scotia Buyer Resource Centre: Practical guides to help you prepare, evaluate a property and navigate the home-buying process.