Mortgage Preapproval in Canada: Your Step-by-Step Guide

What Is Mortgage Preapproval?

Mortgage preapproval is a process where a lender reviews your finances and determines the maximum amount they may lend you and at what interest rate. This is an estimate, not a guarantee, of the mortgage amount and rate you may qualify for.

You may also hear terms like mortgage prequalification or mortgage preauthorization, depending on the lender. In essence, these all refer to the initial financial review that gives you an idea of your borrowing capacity and a possible rate hold.

• It is based on the financial information you provide and a credit check.
• It helps you shop with confidence, knowing how much you may be able to borrow.
• It is not the final approval—your full application will still need to be verified and approved later.

Sources: Financial Consumer Agency of Canada, WOWA.ca

Why Get Preapproved?

Getting preapproved is a smart early step when you're thinking about buying a home. It gives you a clear picture of what you can likely afford, so you can focus your home search and avoid disappointment.

A preapproval also shows sellers that you are a serious buyer. Many real estate agents and sellers expect to see a preapproval letter before considering an offer.

• Set a realistic budget for your home search.
• Strengthen your offer when you find a property.
• Lock in a rate for a certain period (a rate hold), protecting you from rate increases while you shop.

Sources: Financial Consumer Agency of Canada, WOWA.ca

How the Preapproval Process Works

The preapproval process involves a lender or mortgage broker reviewing your finances. They look at your income, debts, credit score, and assets to determine the maximum amount you may borrow and the interest rate they may offer.

After you apply, the lender will likely do a hard credit check, which can temporarily lower your credit score by a few points. However, multiple credit inquiries for a mortgage within a short period (typically 14 to 45 days) are usually counted as a single check, so shopping around won't hurt your score more than a single inquiry.

You'll receive a preapproval letter outlining the amount, the rate, and how long the rate hold lasts. The process can take as little as 24 to 48 hours, but it may take longer depending on your financial situation and the lender's workload.

1. Gather your financial documents: personal identification, proof of income, banking details, a list of assets, and a detailed accounting of your debts.
2. Shop around or work with a mortgage broker to compare offers from different lenders.
3. Submit your application and provide any additional information the lender requests.
4. Undergo a credit check (hard inquiry) as part of the lender's review.
5. Receive your preapproval letter, which includes the maximum mortgage amount, the interest rate, and the rate hold period.

Sources: Financial Consumer Agency of Canada, NerdWallet Canada, WOWA.ca

Documents Needed for Preapproval

While specific requirements can vary by lender, most preapproval applications require the following information:

• Government-issued photo ID (such as a driver's licence or passport)
• Proof of income: recent pay stubs, employment letter, or tax documents (if self-employed, you may need two years of Notices of Assessment and tax returns)
• Proof of down payment: recent bank statements showing savings or investments
• Details of your debts: credit card balances, loans, and any other monthly obligations
• Information about your assets: savings, investments, or property you own

Sources: NerdWallet Canada, WOWA.ca

Preapproval vs. Prequalification

People often use the terms preapproval and prequalification interchangeably, but they can be different processes. Prequalification is often a more informal estimate based on self-reported information, while preapproval typically involves a more thorough review, including a credit check.

Some lenders may only offer prequalification, while others may use the terms to mean the same thing. The key is to ask the lender or broker exactly what the process involves and what the resulting document will tell you.

• Prequalification is usually quicker and less formal, but it may give you a less accurate picture.
• Preapproval typically requires more documentation and results in a firmer estimate.
• Both are steps toward getting a mortgage, but only a preapproval usually includes a rate hold.

Sources: Financial Consumer Agency of Canada, NerdWallet Canada

What to Do After Getting Preapproved

A preapproval is not the final step. You still need to complete a full mortgage application, and the lender will verify your information, check the property value (via an appraisal), and give you the final approval.

Once you have a preapproval, you can start house hunting with confidence. Remember that the preapproval is only valid for a limited time (often 90 to 130 days), so you'll need to keep your finances in order and be ready to move when you find a home.

• Use your preapproval to guide your home search and offers.
• Don't make any major financial changes, like taking on new debt, that could affect your approval.
• When you make an offer, include your preapproval letter to strengthen your position.
• After your offer is accepted, complete the final mortgage application and provide any updated documents.

Sources: Financial Consumer Agency of Canada, WOWA.ca