The mortgage pre-approval process is the process taken to get a borrower a pre-approval letter from a lender. It’s important to understand that being pre-approved for a mortgage requires a vigorous investigation of the borrower’s personal, financial, tax, and employment situation that requires the gathering, organization, and submission of a fair amount of documentation. The result of the process is a pre-approval letter from a lender that gives the borrower a degree of confidence about what the lender will probably be willing to finance.
What is a Mortgage Pre-Approval?
Benefits of Being Pre-Approved
What is a Mortgage Pre-Approval?
A mortgage pre-approval involves a lender reviewing your financial information—including income, debts, credit history, and assets—to determine how much they might be willing to lend you for a home purchase. This process is more comprehensive than a simple pre-qualification, which usually doesn’t involve a credit check or detailed financial review.
Before Getting Pre-Approved
There are several things you need to do before you engage in the pre-approval process. First, you need to put yourself in a position to buy your home and get yourself mortgage financing. You should have established a relationship with a licensed mortgage agent, who you’ve worked with to create your mortgage strategy and your mortgage plan around your goals, your risk profile, and what you want to achieve. You’ve followed my guidance on strategies to build your down payment, minimize taxes, build up your credit score, position your career, and maximize your borrowing position. Not sure what I’m talking about? See my other videos, read my articles on AllenEhlert.com, or just become a client; there’s no cost.
Benefits of Getting Pre-Approved
You don’t necessarily need to be pre-approved to get a mortgage. Pre-approval is a service offered by banks and credit unions to help people plan for their home purchase. The most valuable part of a mortgage pre-approval is the interest rate hold, which is a promise to hold an offered interest rate (all other things being equal) for a period of 60 to 120 days depending on the lender and the mortgage product.
Keep in mind that a mortgage pre-approval and even the mortgage pre-approval letter from a lender doesn’t pre-approve you for anything. It just says that under these conditions we will probably give you a mortgage, but we don’t guarantee it.
Benefits of Getting a Pre-Approval Letter:
- Budget Clarity: Understand how much you can afford before you start house hunting.
- Interest Rate Hold: Some lenders offer to lock in an interest rate for a certain period (typically 60 to 120 days), protecting you from rate increases.
- Negotiation Leverage: Sellers may view your offer more favourably if you have financing pre-approved.
- Faster Closing Process: Having pre-approval can speed up the final mortgage approval once you’ve found a property.
Read more: Discover Why ‘B’ Lenders Don’t Pre-Approve
The Pre-approval Process
In the pre-approval process, the Mortgage Agent helps prepare the client and assesses their eligibility for a mortgage by reviewing financial details and submitting preliminary information to potential lenders.
Here’s a detailed look at what I do during the pre-approval phase:
1. Initial Client Consultation
- Understand Client Goals: The Mortgage Agent begins by discussing the client’s goals, such as the desired property type, location, and budget, to align on what’s affordable and realistic. In the business, we call this the ‘discovery call’. During the discovery call a Mortgage Agent ‘triages’ the client to understand if the Mortgage Agent is the best professional to assist the client.
- Explain the Process: The Mortgage Agent walks the client through the mortgage process, explaining the steps and timelines involved in pre-approval and how it leads to full approval.
2. Identification
- Collect Client Identification: It is a legal requirement to collect client identification information so the Mortgage Agent can prove to the regulator (FSRA) during an audit that the client is who they say they are. This is to comply with AML legislation and to protect all parties involved in the transaction.
- Identify Politically Exposed People: The vast majority of Canadians are not politically exposed people.
A Politically Exposed Person (PEP) and a Domestically Politically Exposed Person (DPEP) are individuals in high-profile or influential positions, making them potentially vulnerable to involvement in or exposure to illicit financial activities, such as money laundering or corruption. Canadian laws require Mortgage Agents to identify PEP and DPEP people early in the mortgage process.
3. Document Collection Process
Like a surgeon who gathers as much information as possible (patient examination, blood tests, MRI, x-rays, etc.) before cutting into a patient, a Mortgage Agent needs to collect as much information as possible about the client to provide the best care and ensure the optimum outcome. The process of collecting this information is the Document Collection Process.
During this process, the Mortgage Agent:
- Review the document collection process.
- Explains to the client the importance of documents today and why they are required.
- Encourages clients to start collecting and building their document application package.
- Instruct clients on how to put documents into electronic form and submit them securely.
4. Application Underwriting
- Income Verification: The Mortgage Agent collects preliminary income information, including pay stubs, employment letters, and tax documents (like T4s or NOAs) to assess income stability if the applicant is an employee. If the applicant is self-employed, I collect information about your business, and we discuss the various mortgage programs applicable to business owners to see what is the best fit for you.
- Down Payment Verification: The Mortgage Agent reviews the client’s savings or other sources of funds intended for the down payment and closing costs, ensuring they meet lender criteria.
- Credit Review: With the client’s permission, the Mortgage Agent pulls a credit report to check credit scores, existing debts, and payment history, which impacts mortgage qualification.
- For more information see:
- Hard vs Soft Credit Pull
- How Do Credit Scores Work
- Credit Score and Your Mortgage
- Top Credit Score Myths
5. Preliminary Assessment of Borrowing Capacity
- Calculate Debt Service Ratios: The Mortgage Agent calculates the Gross Debt Service (GDS) and Total Debt Service (TDS) ratios, which help determine how much mortgage the client can afford based on income and debts.
For more information see: Calculating Debt Service Ratios - Estimate Mortgage Amount: Based on the initial financial review, the Mortgage Agent provides an estimate of the mortgage amount for which the client may qualify, along with estimated interest rates and terms.
6. Develop a Mortgage Strategy
- Develop Mortgage Strategy: Once the documents have been collected and I have completed a financial analysis, we are now in a position to discuss your options. Combined with your vision, lifestyle, goals, income situation, and risk tolerance, we can broadly discuss approaches that align with your goals and how to achieve them.
For more information see: - Develop Mortgage Plan: Based on the developed mortgage strategy, I can now develop the Mortgage Agent plan which describes how best to achieve your goals. It includes what you want to achieve, your risk tolerance, your timeframe to become mortgage-free, how your mortgage strategy and plan fits in with your broader financial plan as well as the approach to monitor your progress, take advantage of opportunities, and keep you on track.
7. Submit Pre-Approval Application to Lenders
- Choose Potential Lenders: Based on the client’s profile, the Mortgage Agent identifies suitable lenders and submits a pre-approval application, aiming to secure competitive terms.
For more information see: Canada’s Lenders Exposed - Await Lender Response: The Mortgage Agent waits for feedback from the lender, which typically includes an indication of how much the client may borrow and under what conditions.
8. Review Pre-Approval Terms with Client
- Explain Pre-Approval Terms: If approved, you’ll receive a letter stating the maximum mortgage amount you’re qualified for and any conditions. The Mortgage Agent reviews the lender’s pre-approval terms with the client, clarifying the interest rate, loan term, and any specific conditions that need to be met.
- Discuss Expiry and Conditions: The Mortgage Agent explains that pre-approvals usually expire after 90–120 days and may be subject to conditions, such as satisfactory appraisal or verification of income closer to the closing date.
9. Guide the Client on the Next Steps
- Outline Requirements for Full Approval: The Mortgage Agent advises on additional documentation needed for final approval, such as a formal offer to purchase (Agreement of Purchase and Sale), updated income verification, or confirmation of down payment.
- Provide Budget Guidance: The Mortgage Agent helps the client understand how the pre-approval impacts their property search, offering guidance on affordability limits.
9. Monitor the Client’s Financial Status
- Caution Against Financial Changes: The Mortgage Agent advises the client to avoid taking on new debt or changing jobs, as these could impact final approval.
For more information see: - Encourage Open Communication: The Mortgage Agent establishes an open line of communication for updates on the client’s financial status, ensuring there are no surprises at the approval stage.
Pre-approval Process Summary
The pre-approval process provides clients with a clear picture of their borrowing capacity and allows them to enter the real estate market with confidence. It’s important to understand that being pre-approved or a pre-approval isn’t actually an ‘approval’. It is a statement by a lender that under the defined circumstances it is likely that the lender will give you a mortgage at the suggested terms.
The Mortgage Agent’s guidance at this stage is essential, ensuring clients understand their limits and are well-prepared for the next phase, which is securing a mortgage commitment when they find the right property.
You don’t have to get a pre-approval to get a mortgage. Alternatively, you can obtain a mortgage commitment (or firm approval) or get full underwriting approval.
