Mortgage pre-approval: what it is and how it works

A pre-approval is a lender's written opinion, after reviewing your finances, of how much you can borrow and at what rate. It lets you shop with a firm budget, and it usually guarantees the rate for a set time.

The short version: a pre-approval tells you your price range and holds a rate, usually for 90 to 120 days. It is not a final commitment.

What you need to provide

• Income documents: pay stubs, a letter of employment, and recent tax assessments or T4s. Self-employed borrowers usually need two years of tax returns and notices of assessment.
• ID and banking: photo ID and bank statements.
• Down payment: proof of the funds and where they came from, including a gift letter if a relative is helping.
• Debts: details of loans, credit cards and lines of credit.

The lender checks your credit report, your debts and the stress test.

How the rate hold works

Most pre-approvals hold the rate for 90 to 120 days. If rates rise, you keep the lower rate. Many lenders will give you a lower rate if rates fall, but ask before you assume. The hold is only for the type of mortgage and the amount in your approval.

Pre-approval versus pre-qualification

A pre-qualification is a quick estimate without a full review, often online. A pre-approval involves documents and a credit check, and it carries more weight with sellers.

What a pre-approval does not guarantee

A pre-approval is not a final commitment. The lender still verifies the property, the appraisal and your finances before closing, and the approval can be withdrawn if your situation changes. The appraisal may come in below your purchase price, in which case you need more cash.

Before you apply

• Check your credit report for errors.
• Collect two years of income documents, especially if you are self-employed.
• Do not take on new debt, change jobs or make large unexplained deposits before closing.

Example

You are pre-approved for $500,000 at 4.2% for 120 days. You find a home at $480,000 on day 60. You keep your rate, even if lenders have raised theirs, as long as the deal closes in time. If your closing is on day 150, the hold may have expired, so ask whether it can be extended.

Shopping around

Applying with several lenders in a short window is common, and credit bureaus usually count similar inquiries made close together as one, but ask each lender how they report. A mortgage broker can compare several lenders with one credit check.