What is a Mortgage Pre-Approval?

by Hashem Nahar

Before buying your home, it is important for you to go through the mortgage pre-approval process.

The Mortgage Pre-approvals Process

A pre-approval is when a potential mortgage lender looks at your finances to find out the maximum amount they will lend you and what interest rate they will charge you. With a pre-approval, you can:

  • know the maximum amount of a mortgage you could qualify for
  • estimate your mortgage payments
  • lock in an interest rate for 60 to 120 days, depending on the lender

The pre-approval amount is the maximum you may get. It does not guarantee that you'll get a mortgage loan for that amount. The approved mortgage amount will depend on the value of your home and the amount of your down payment. It may be a good idea to also look at properties in a lower price range so that you don’t stretch your budget to its limit. Remember that you’ll also need money for your closing costs.

The lender determines the maximum mortgage amount you can afford to pay, as well as your monthly mortgage payments based on the following three items:

  • Down payment
  • Credit score
  • Debt servie ratios

Down payment

As previously discussed, it is important for you to have saved up money to put towards your down payment. Your down payment amount directly affects your mortgage affordability. As such, based on your down payment, the lender will allow you to burrow a certain amount of money. The bigger your down payment is, the more the lender will be willing to lend you.

Credit score

Your credit score provides lenders with insight on your financial situation. Depending on your credit score, you will either qualify for a mortgage with a level “A” lender or a level “B” lender.

If your credit score is between 680 and 900, you qualify for a mortgage with an “A” level lender. Level “A” lenders include top brokerages and major banks.

If your credit score is between 600 and 680, lenders will weigh other financial factors to determine your eligibility. Depending on your assessment, you may qualify for an “A” level lender or a “B” level lender, like Home Trust or Equitable Bank.

-If your credit score is below 600, you won’t get the best rates and only qualify to work with a “B” level lender.

Debt service ratios

This factor determines the largest monthly mortgage payments you can afford to pay. This calculation is based on your income, debt and expenses. As such, debt service ratios further provide lenders with insight on your financial situation, helping them quantify the amount of money they are willing to lend you.

We highly recommend you work with a mortgage broker to determine if you qualify for a mortgage and the details of your mortgage - such as the term, costs and total loan amount.