What Is A Mortgage Pre Approval?
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Before you go house or condo shopping, it’s important to know how much of a mortgage you’ll qualify for.
There’s nothing worse than falling in love with the perfect home only to find out that you don’t qualify to purchase it. A Mortgage Pre Approval is also referred to as Mortgage Qualification (not to be confused with a Pre-Qualification). A pre approval is the process of collecting and reviewing all the necessary information and documentation that a Mortgage Lender will need when approving an actual mortgage loan once you purchase a property. The pre approval is just done in advance to make sure you’ll qualify in the first place. You can search online for a mortgage affordability calculator in order to calculate your own mortgage affordability. This is okay if you’re just looking to get a rough idea of how much you might qualify for, or for budgeting type purposes, but it is not an actual mortgage preapproval. |
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There are many factors that are considered when qualifying for a mortgage such as:
All of these factors are taken into consideration with every single mortgage application so it’s impossible to tell how much you’d be pre-approved for using just a mortgage affordability calculator.
- Credit strength and history
- Your credit score and how you’ve used and managed your credit in the past
- Employment status, type and history
- How you earn income (employed/self- employed/seasonal/part time/full time/child support/foster income/etc.)
- Down payment source and amount
- How much of a down payment do you have and where is the money coming from (is your family gifting you the down payment or have you saved it up on your own?)
- Income type and amount
- How are you paid? (wage, salary, tips, commission, piece work, combination, etc.)
- Assets vs. Liabilities
- What do you own and who do you owe how much money to?
All of these factors are taken into consideration with every single mortgage application so it’s impossible to tell how much you’d be pre-approved for using just a mortgage affordability calculator.
Mortgage Pre Qualification
You’ll hear the term pre-qualification being used a lot in the same context as the term pre approval. The 2 terms are commonly used interchangeably but they are not the same thing.
A pre-qualification is a short-cut process used by some of the Banks and Credit Unions in place of a proper pre approval to save them time and money.
A pre-qualification is basically just like using a mortgage affordability calculator except it may involve a credit check. There are no documents collected or reviewed during this process.
The problem with this process is that the amount you get pre-qualified for isn’t based on fact. Let’s say that the Banker asks you what your salary is and you say “$50,000” but your actual salary is $47,800, and the amount owing on your credit card is actually $5000 but you say $3500 because you’re not exactly sure. This affects how much of a mortgage you’ll qualify for.
A pre-qualification is a “best-guess” on what you’re qualified to spend, whereas a pre approval is guaranteed.
When applying for a mortgage, all the information that the Lender receives needs to be backed up by the paperwork to prove it.
Don’t waste your time on a pre-qualification.
A pre-qualification is a short-cut process used by some of the Banks and Credit Unions in place of a proper pre approval to save them time and money.
A pre-qualification is basically just like using a mortgage affordability calculator except it may involve a credit check. There are no documents collected or reviewed during this process.
The problem with this process is that the amount you get pre-qualified for isn’t based on fact. Let’s say that the Banker asks you what your salary is and you say “$50,000” but your actual salary is $47,800, and the amount owing on your credit card is actually $5000 but you say $3500 because you’re not exactly sure. This affects how much of a mortgage you’ll qualify for.
A pre-qualification is a “best-guess” on what you’re qualified to spend, whereas a pre approval is guaranteed.
When applying for a mortgage, all the information that the Lender receives needs to be backed up by the paperwork to prove it.
Don’t waste your time on a pre-qualification.
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Qualifying For A Mortgage In CanadaThere are many factors that affect how much of a mortgage you’ll qualify for or if you’ll even qualify at all.
The primary factors that are considered when evaluating your mortgage application are:
Mortgage Lenders use something called the 5 C’s of Credit to determine whether they want to lend you money or not. |
The 5 C’s are:
Capacity - This refers to your ability to make your mortgage payments. Does your monthly income leave enough money for a mortgage payment, after all other monthly payments are made? Capacity also refers to your past history on making payments on time.When determining whether or not you can afford the mortgage you’re applying for, Lenders use something called a Debt Service Ratio. A Debt Service Ratio takes the cost of the home you’re trying to purchase (mortgage payment + property taxes + heat) and divides it by your gross monthly income. The number it produces must fall below a certain limit. Different Lenders have different limits. If the number is too high, then the numbers need to be adjusted to fall within the parameters.
Capital - How much of a down payment do you have and where is it coming from? A larger down payment coming from your own savings looks better on an application than a minimal down payment which is a gift from a family member.
Character - This is the general picture of what you look like as a borrower. How long have you been at your job? Are you more of a saver or a spender? Are you responsible with your credit?
Credit - How long have you had credit and how responsible are you with your credit?
Collateral - The last “C” refers to the property you’re trying to purchase. The Lender is essentially buying the property for you until you pay them back so they want to make sure the property is worth the price. They’ll evaluate the price, the location, the condition, the age, etc. to determine whether they are willing to lend money to you for the purchase.
The 5 “C’s” are used individually as well as in relation to each other. For example, if your Credit is good but your Collateral is coming as a gift, then that might be okay, however, if your Credit is bruised and your Capital is a gift, Lenders may not approve it and may want you to save up your own Capital so that you have more personal “skin in the game”.
All 5 “C’s” are taken into consideration on every mortgage application.
When qualifying for a mortgage, all Lenders have different criteria that an applicant must meet in order for that Lender to approve them. For example, it's common for Canadian families with children to receive Child Care Benefit from the Federal Government each month. Some Lenders will allow this to be considered income and other Lenders won't.
Lenders can pick and choose who they want as their clients which makes sense as it is their money that they're lending out. This is another reason why it's so important to have a wide selection of Lenders to choose from when sourcing a mortgage; the more selection, the more money you'll potentially qualify for and the better deal you'll get.
Capacity - This refers to your ability to make your mortgage payments. Does your monthly income leave enough money for a mortgage payment, after all other monthly payments are made? Capacity also refers to your past history on making payments on time.When determining whether or not you can afford the mortgage you’re applying for, Lenders use something called a Debt Service Ratio. A Debt Service Ratio takes the cost of the home you’re trying to purchase (mortgage payment + property taxes + heat) and divides it by your gross monthly income. The number it produces must fall below a certain limit. Different Lenders have different limits. If the number is too high, then the numbers need to be adjusted to fall within the parameters.
Capital - How much of a down payment do you have and where is it coming from? A larger down payment coming from your own savings looks better on an application than a minimal down payment which is a gift from a family member.
Character - This is the general picture of what you look like as a borrower. How long have you been at your job? Are you more of a saver or a spender? Are you responsible with your credit?
Credit - How long have you had credit and how responsible are you with your credit?
Collateral - The last “C” refers to the property you’re trying to purchase. The Lender is essentially buying the property for you until you pay them back so they want to make sure the property is worth the price. They’ll evaluate the price, the location, the condition, the age, etc. to determine whether they are willing to lend money to you for the purchase.
The 5 “C’s” are used individually as well as in relation to each other. For example, if your Credit is good but your Collateral is coming as a gift, then that might be okay, however, if your Credit is bruised and your Capital is a gift, Lenders may not approve it and may want you to save up your own Capital so that you have more personal “skin in the game”.
All 5 “C’s” are taken into consideration on every mortgage application.
When qualifying for a mortgage, all Lenders have different criteria that an applicant must meet in order for that Lender to approve them. For example, it's common for Canadian families with children to receive Child Care Benefit from the Federal Government each month. Some Lenders will allow this to be considered income and other Lenders won't.
Lenders can pick and choose who they want as their clients which makes sense as it is their money that they're lending out. This is another reason why it's so important to have a wide selection of Lenders to choose from when sourcing a mortgage; the more selection, the more money you'll potentially qualify for and the better deal you'll get.
Mortgage Stress Test
In 2017, the Federal Government of Canada introduced Canadians to something referred to as the “Stress Test.”
The Stress Test forces everyone applying for a mortgage to qualify for that mortgage at an inflated interest rate.
The reason for the stress test came from the Government’s growing concern about the debt levels of Canadian citizens. The stress test was designed to reduce the risk of people not being able to afford their mortgage payments should interest rates rise significantly.
When determining your mortgage affordability, your debt service ratio is calculated. This calculation takes the cost of the home you’re hoping to purchase (monthly mortgage payment + property taxes + heat) and divides it by your gross monthly income. The resulting number must fall below a certain limit which is determined by the Lender and/or Mortgage Default Insurer and can be different for each one. The mortgage interest rate that is used to calculate the mortgage payment to be used in the debt service ratio is the current stress test rate.
So you can see that the stress test is very cautious and reduces the risk of Canadian homeowners becoming over extended on their mortgage debt. The down side is that it can also make it difficult for certain Canadians to qualify for enough of a mortgage to afford the home that suits their needs best.
The Stress Test forces everyone applying for a mortgage to qualify for that mortgage at an inflated interest rate.
The reason for the stress test came from the Government’s growing concern about the debt levels of Canadian citizens. The stress test was designed to reduce the risk of people not being able to afford their mortgage payments should interest rates rise significantly.
When determining your mortgage affordability, your debt service ratio is calculated. This calculation takes the cost of the home you’re hoping to purchase (monthly mortgage payment + property taxes + heat) and divides it by your gross monthly income. The resulting number must fall below a certain limit which is determined by the Lender and/or Mortgage Default Insurer and can be different for each one. The mortgage interest rate that is used to calculate the mortgage payment to be used in the debt service ratio is the current stress test rate.
So you can see that the stress test is very cautious and reduces the risk of Canadian homeowners becoming over extended on their mortgage debt. The down side is that it can also make it difficult for certain Canadians to qualify for enough of a mortgage to afford the home that suits their needs best.
