The pre-approval season

A FOUNDRY COMPANY FIELD GUIDE · NO. 09

A pre-approval tells you the maximum a lender is presently willing to consider, and holds a rate for a limited window while you look. It is a starting position rather than a decision, and the difference is why we wrote this guide.

Pre-approval and pre-qualification are the same conversation under two names

The Financial Consumer Agency of Canada says the process may also be called mortgage prequalification or mortgage preauthorization, and that different lenders have different definitions and criteria for each step they offer. There is no rule in Canada separating the terms.

The practical consequence is that the label tells you nothing and the paperwork tells you everything. A lender who has seen documents and run a credit check has done real work. A lender who has heard a number over the phone has not, whichever word appears at the top of the email.

The lender assesses what you own, what you earn and what you owe

Assets, income and level of debt is the Agency's own summary of what gets weighed, and the property itself gets assessed separately and later against the lender's own standards, which vary from lender to lender.

The debts counted are broader than people expect. Credit card balances, child or spousal support, car loans, lines of credit and student loans all appear on the same page. Anything with a monthly obligation attached to it is part of the picture, including the ones that felt settled years ago.

The paperwork barely changes from one lender to the next

Identification. Proof of employment, meaning a recent pay stub, your position and how long you have been there. Proof you can cover the down payment and the closing costs. Information on other assets such as a vehicle. Information on your debts. If you are self-employed, the Agency names your Canada Revenue Agency notices of assessment for the past two years.

Lenders may also ask for recent statements from bank or investment accounts to confirm where the down payment is coming from. Assemble all of it once, into one folder, because every lender you speak to will want the same folder.

Shopping around does less damage to your credit than people think

A lender running your credit as part of an application creates a hard inquiry, and Equifax Canada says a hard inquiry usually affects your score and can remain on your report for a few years. That much is the part everybody has heard.

The part fewer people have heard is that Equifax Canada also confirms a rate-shopping allowance. Multiple inquiries made for the same purpose within a short period, with mortgages named explicitly, are generally counted as one. Every inquiry still shows on the report and generally only one inside the window affects the score. The exception does not extend to credit cards, so applying for a card during your search is a separate matter entirely.

A pre-approval is not a commitment to lend

The Agency states it twice. The process does not guarantee your approval for a mortgage, and the pre-approved amount is the maximum you may get rather than a guarantee of a mortgage for that amount. A lender can decline afterward, and can also approve a smaller amount, charge more, ask for a larger down payment, or ask for a co-signer.

The property is part of that. A lender verifies that the specific home meets its own standards, and those standards differ between lenders, so the same buyer with the same pre-approval can be approved on one property and declined on the next.

The financing condition is where it becomes real

In an Alberta purchase contract, the financing condition makes the deal subject to the buyer securing new financing on terms satisfactory to the buyer, from a lender of the buyer's choosing, by a stated date, with the seller cooperating by providing access to the property. That date is the one that decides everything and we write it into the offer.

So the sequence runs pre-approval, then a property, then the actual approval against that property, then removal of the condition. The five terms an offer is built from covers where the condition sits inside everything else. The six stages a first purchase runs through puts this one in order with the rest.

Change nothing between the pre-approval and the keys

Everything the lender assessed gets re-checked before the money is advanced, employment included. A new car loan, a new credit card, a job change into a probationary period, a missed payment, or a large deposit nobody can explain will all be looked at again, and any of them can change the answer.

The rule for the whole season is that boring. Keep your income where it is, keep your debts where they are, and buy the car after you move.

For your numbers, talk to a mortgage professional.