Getting pre-approved turns a price range you have guessed at into a number your broker has checked against what lenders will accept.
This page covers what lenders look at, what a pre-approval does and does not promise, and what Michelle Scheibel puts in front of a lender to get one issued.
What a Pre-Approval Is
A pre-approval is your broker’s assessment of how much you can borrow, measured against the policies of the lenders your file suits. It is based on documents you have supplied and a credit check. That makes it a considered position rather than a courtesy estimate.
The Five Things Lenders Assess
Every pre-approval comes down to the same five questions, whatever lender the file goes to.
- Income, and how provable it is. Salaried employment with a T4 is the simplest case. Commission, bonus, contract, self-employment and rental income all count, but each is verified differently and some lenders treat them more generously than others.
- Credit history and score. For an insured mortgage, at least one borrower or guarantor needs a minimum credit score of 600, per CMHC’s published requirements. A higher score widens the field of lenders and improves the rate you are offered.
- Debt service ratios. CMHC’s maximum thresholds are a gross debt service ratio of 39 percent and a total debt service ratio of 44 percent. Gross debt service covers the mortgage payment, property taxes, heat and half of any strata fees. Total debt service adds every other monthly obligation you carry.
- Down payment, and where it came from. Lenders verify the source, not just the balance. Savings, the sale of a property and a non-repayable gift from a relative are all acceptable to CMHC. Money that appeared in the account last week without explanation is not.
- The stress test. Your ratios are calculated using a qualifying rate that is the greater of your contract rate plus two percent, or 5.25 percent, whichever is higher. You qualify at that rate even though you pay the contract rate.
How Much Down Payment You Need Before a Lender Will Look
The minimum down payment in Canada is tiered by purchase price, and this is the figure most commonly got wrong.
- 5 percent on the first $500,000 of the purchase price
- 10 percent on the portion between $500,001 and $1,499,999
- 20 percent on any home priced at $1,500,000 or more, where no insured mortgage is available
On a $700,000 Kelowna purchase that works out to $25,000 on the first $500,000 plus $20,000 on the remaining $200,000, for a minimum of $45,000. It is not $35,000, which is what a flat five percent would suggest.
Anything under 20 percent down requires mortgage default insurance and is capped at a purchase price below $1,500,000. At 20 percent or more the mortgage is conventional and uninsured, which is the maximum a federally regulated lender may advance without insurance.
What to Have Ready Before the Application
The list below is what a straightforward salaried file needs. Self-employed, commission and newcomer files carry their own requirements, and Michelle will tell you what yours needs before you start gathering paper.
- Government-issued photo identification for every applicant
- Recent pay stubs, a letter of employment stating your position, salary and start date, and your last two T4 slips
- Notices of Assessment for the last two years from the Canada Revenue Agency
- Ninety days of history on the account holding your down payment, showing where the money came from
- A gift letter, where any part of the down payment is a gift from a relative
- Details of every debt you carry, including balances and monthly payments
- A recent mortgage statement and property tax assessment, if you already own
Where a Broker Changes the Outcome
A pre-approval from a single institution tells you what that one lender will do. It says nothing about what any other lender would have done with the same file, and lenders differ substantially on the things that decide borderline applications.
Michelle submits one application and assesses it against the lenders on her panel, which includes banks that lend through broker channels, credit unions, monoline lenders and alternative lenders. Where the file is straightforward, that competition is about rate and terms. Where it is not, it is about which lender will approve it at all.
The differences that matter most in practice are how a lender treats variable income, whether it will use rental income from a suite and at what percentage, how it views a short employment history after a job change, and how it handles a self-employed borrower whose tax return understates what the business earns. On a file with any of those features, the choice of lender is the approval.
What Happens After You Are Pre-Approved
Your pre-approval usually comes with a rate hold, which protects the rate quoted for a set period while you shop. If rates fall during that window you take the lower rate; if they rise you keep the one you were given.
Once you have an accepted offer, the file goes back to the lender for full approval on the property itself. That is when the appraisal is ordered and the remaining conditions are worked through. Michelle manages that stage with the lender directly rather than leaving you to chase it.
Three things will put a pre-approval at risk between issue and closing, and all three are avoidable. Do not change jobs, do not take on new debt of any size, and do not move your down payment between accounts without keeping the paper trail.
Pre-Approval FAQs
Does a pre-approval affect my credit score?
A pre-approval involves a credit check, which is recorded on your file. Multiple mortgage enquiries within a short window are generally treated as a single event by the credit bureaus, since they reflect one person shopping for one mortgage rather than seeking several new debts.
How long does a pre-approval last?
Rate holds run 90 to 120 days, depending on the lender. Michelle will confirm the exact length of your hold, and will renew your pre-approval if you are still looking when it expires.
Can I be turned down after being pre-approved?
Yes. A pre-approval assesses you, not the home. It can fall through if the property does not appraise at the purchase price, if title or condition problems surface, or if your income, employment or debt position changes before closing.
Should I get pre-approved before I contact a realtor?
It is usually the better order. A realtor can work far more efficiently with a verified budget than an estimated one, and in a competitive situation an offer backed by a pre-approval is treated differently from one that is not.
What if I am self-employed or my income varies?
Bring it up at the start rather than partway through. Variable and self-employed income is entirely financeable, but the lender that fits the file is often not the one that would have fit a salaried borrower, and knowing that early saves a rejected application.
To get pre-approved for a Kelowna mortgage, contact Michelle Scheibel at My Kelowna Mortgage. She is licensed by the BC Financial Services Authority and places files with banks, credit unions, monoline and alternative lenders through a single application.