How To Get A Mortgage Pre-approval

A mortgage pre-approval essentially verifies how much a lender is willing to lend to you in your current financial situation considering factors such as your income, savings (for a down payment), debt level, assets and credit score. It provides you a price range so you know how much you can afford, and shows sellers you’re serious about the offer. A pre-approval falls between the initial pre-qualification and mortgage application stages.

A mortgage pre-approval will list details such as the mortgage term, interest rate and principal amount. A lender will typically offer a rate up to 120 days. If interest rates go up during that time, your lender should honour that held rate provided you meet all other conditions of the loan.

While not necessary, a pre-approval should be considered an essential step for home buyers as it makes your purchase offer more competitive. Realtors are likely to take you more seriously and sellers generally favour an offer from someone who has already been pre-approved for a loan versus someone who hasn’t, as the deal in that case is less likely to fall apart due to lack of financing.

What’s more,  you, as the seller, will have a complete financial picture of what property you can afford saving you heartbreak when you find your dream home only to learn that you can’t secure a mortgage for it.

It’s essential to note that mortgage pre-approval isn’t a  commitment to lend and you’ll still need to get approved for a mortgage when you decide to buy a home.

Nowadays, most lenders allow you to get pre-approved online, though you can also start a pre-approval on the phone or at a branch.

Whether you’re working with a bank branch, online bank, credit union, mortgage broker or other lender, make sure you have the following documentation:

• Government ID such as a driver’s licence or passport
• Your social insurance number (SIN)
• Pay stubs and proof of any other income
• Recent statements for every bank and investment account
• Income tax returns from at least the past two years
• Statements related to any debts, such as student loans, car leases and personal loans

Learn more: Five Things You Need To Be Preapproved For A Mortgage

In short, the earlier the better. Some mortgage lenders recommend reaching out for pre-approval as early as 12 months before you plan to buy a home to get a headstart on addressing any issues that might come up. But overall, the time between when you apply for pre-approval and when you begin house-hunting depends on your unique situation, how prepared you are and how ready you are to commit to the process.

Know that with an active pre-approval letter in hand, you’ll significantly increase your chances of having your purchase offer accepted.

The speed at which a lender pre-approves a potential borrower varies. It depends a lot on how quickly you gather and submit the necessary documents and how long it takes them to review your financial paperwork.

Once the lender has all your information, you should receive a loan estimate within three business days—much less if you use an online mortgage lender—that will tell you whether or not you’ve been pre-approved and for how much.

How Long Does Pre-approval For A Mortgage Last?

The length of time varies depending on the lender. Most mortgage pre-approvals are valid for 30, 60, 90 or 120 days and then expire.

Mortgage pre-approval and pre-qualification are different, so don’t confuse the two.

Essentially, pre-qualification provides a snapshot of what you can afford based on self-reported data, such as your income, debt and assets. Since pre-qualification doesn’t verify financial data, identify red flags or address potential issues, it won’t improve a buyer’s standing with the seller’s team.

Mortgage pre-approval represents a lender’s offer to loan the buyer money based on certain financial circumstances and specific terms. The lender reaches this point only after reviewing and confirming the buyer’s credit standing, employment, income, assets and/or tax returns.

A mortgage pre-approval is not a guarantee to receive a home loan. You’ll still need to apply for a mortgage with the lender before you receive any funding.

When you apply for a mortgage, you’ll need to provide similar documentation along with the purchase agreement for your new house. Mortgage approval also requires a home appraisal to determine the loan-to-value (LTV) ratio.

For almost any potential home buyer, the pre-approval process offers substantial benefits. Namely, a lender’s support can strengthen any purchase offer that the buyer submits. And, for a buyer’s personal finances, a pre-approval can help you better grasp all the costs associated with buying a house—both up front and on an ongoing monthly basis.

These pre-approval benefits, however, come with some considerations. The financial circumstances that form the basis for a lender’s willingness to extend a mortgage to a buyer can change over time. As a result, mortgage pre-approvals will expire after a certain time period, such as 90 or 120 days. And if your circumstances change during that time, say you lose your job, then the pre-approval may no longer be valid.

If the buyer hasn’t gone under contract at that point, a lender will need to run through the pre-approval checklist again, using updated financial data as necessary.

The Bottom Line

Anxiety or a lack of information should not discourage potential buyers from starting the mortgage pre-approval process.

It’s far more valuable to find out in advance whether your credit is good or needs work. You don’t want to find yourself saying, “I wish I had started this process four months ago” or losing out on a house because another buyer had a stronger offer.