If you’re new to mortgages and homeownership, the recommended steps in the process can sound confusing, including the initial ones often called pre-qualification and pre-approval, which may sound very similar.
Some lenders and brokers suggest pre-qualification as a first step when you’re initially exploring the market and want a very general feel for what’s possible. However, when you’re actively hunting for a home, pre-approval is a much more significant and highly recommended step to make the purchase process go much smoother.
In fact, as Meridian mortgage expert Mike Healy points out, the central importance of pre-approval makes any pre-qualification efforts unnecessary and even potentially dangerous.
“A mortgage pre-qualification holds little actual value, as it provides only a rough estimate of what you might be able to borrow,” explained Healy. “Many house hunters who rely on pre-qualification find a home they love and then face disappointment—or even lose tens of thousands of dollars on their deposit—when the deal falls through due to financing issues.”
What’s your best first step?
Here’s a side-by-side comparison of the two options:
| Mortgage pre-qualification | Mortgage pre-approval | |
|---|---|---|
| When to do it | When contemplating a home purchase | Before you begin house hunting |
| Why do it |
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| How to do it |
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| Key details |
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Why pre-approval is so strongly recommended
Unlike pre-qualification, a formal pre-approval gives you a clear understanding of your actual borrowing capacity, helping you focus on homes within your true budget.
“The pre-approval can uncover critical factors that affect your mortgage eligibility,” Healy points out, “such as negative items on your credit bureau or income types that lenders may not fully consider, like bonuses or commissions.”
With a pre-approval from a recognized lender or broker, these issues can be addressed in advance, giving you a stronger position when making an offer.
How to enhance your standing for mortgage pre-approval
The initial terms that a lender will quote in a mortgage pre-approval depend on several financial factors at the time of the application, including:
- Income
- Employment history
- Credit history and score
- Assets
- Debt information
Documents you need for mortgage pre-approval typically include pay stubs, tax returns, and bank statements. Your broker or lender may ask for additional documentation to get a more complete view of your finances.
So, your pre-approval outcome will improve over time when you:
- Raise your income
- Demonstrate stronger employment history
- Raise your credit score
- Acquire more assets
- Reduce your debt
Things to avoid that may affect final mortgage approval
When you’ve got pre-approval and are ready to make an offer on a house, these actions may hamper your ability to get the mortgage loan approved:
1. New major purchases
Changes to your financial situation after pre-approval could result in a rejected application or substantially different terms. Avoid major purchases that can change your debt level.
2. New credit applications
Adding new forms of debt such as a personal loan or new credit card will also affect your debt rating and may risk your pre-approval. That’s because when lenders or companies request to view your credit report, the report itself gets modified to include what’s called a hard inquiry.
3. Significant employment changes
Because an applicant’s regular and predictable income is a key factor for lenders, changing jobs or becoming self-employed can have a negative impact on the mortgage approval process.
4. Low-value properties
If the home you want to purchase in poor condition (often marketed as a “handyman’s special”), located in a remote area, priced above its appraised value, or considered an unconventional purchase (e.g., a tiny home, co-operative housing, or leasehold property), lenders may be less willing to give you a final mortgage approval. “These factors can raise concerns about the property's marketability, value stability, or legal structure,” notes Healy, “all of which impact the lender’s risk assessment and willingness to take on the loan.”
To learn even more detail about mortgage pre-approval in Canada, explore what our Federal Government recommends that you know about the subject.
Ready for a deeper discussion?
For more on the mortgage process and how to prepare for the best outcome, make an appointment with a Meridian Mortgage specialist.
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