If you’re considering buying a home, you should find out exactly how much of a mortgage you’d be able to get approved for so you focus on properties within your budget. That’s why getting pre-approved for a mortgage before house hunting can be helpful, as it can help you focus on homes within your price range.
But what if you want to buy a more expensive home? Should you spend every penny that you’ve been approved for? While it may be tempting to do so, it’s best to steer clear of the upper limit of your pre-approval amount to ensure your finances aren’t stretched too thin.
Key Points
- A mortgage pre-approval is when a lender assesses your finances and credit to determine how much you can qualify for.
- No matter what mortgage amount you may be pre-approved for, it’s best not to take out the maximum amount.
- It’s generally recommended not to spend the full pre-approval amount to avoid over-stretching your finances.
What Is Mortgage Pre-Approval In Canada?
A mortgage pre-approval is a lender’s initial assessment of how much you can afford on a home purchase based on your income and debt.
If you’re pre-approved for a mortgage, the lender is essentially making a conditional commitment to loan you money.
This commitment is conditional on certain factors, such as property valuation and consistency in your financial situation. The lender will also check your credit score and verify the financial information you provided.
As such, while pre-approval is a big step in the mortgage process, it is not a guarantee that you’ll receive formal approval once your home offer is accepted. You may be approved for more or less than what you were pre-approved for.
| Note: Since pre-approvals are not guaranteed, many add a financing condition to their home offer to protect themselves. With this condition, the buyer can back out of the offer without penalty if their financing arrangement falls through. |
How To Increase Mortgage Pre-Approval Amount
If you’re wondering how to increase your mortgage pre-approval amount, consider the following.
Improve Your Credit Score
Your credit score plays a key role in your ability to secure a mortgage, as well as any other type of loan. If your credit score is a little on the lower end, it could hamper your ability to secure a higher pre-approval amount. In this case, take some time to give your credit score a boost before applying.
You’ll want to increase your credit score to somewhere between 660 and 724. This is generally considered as a ‘good’ credit score. A good credit score can help you qualify for higher amounts as it shows you’re responsible with your finances and make bill payments on time.
Provide A Higher Down Payment
The minimum down payment allowed in Canada is 5% of the purchase price. That said, the larger your down payment, the higher your pre-approved mortgage amount may be. The best way to save for a down payment is by automating your savings and taking advantage of tax-saving accounts like a TFSA, RRSP and FHSA.
You can also look into down payment assistance programs in Canada.
Use All Sources Of Income
Your lender will assess your income to see if it’s high enough to not only make your mortgage payments but all your existing bill payments, too. To help demonstrate you can afford the payments, consider using other income sources. Your income doesn’t necessarily have to come in the form of employment income. You can use all sorts of other income sources to potentially increase the amount you can borrow. The higher your income, the higher the loan amount you may be pre-approved for.
Consider using other income sources such as investment income, income from a rental property, government benefit payments and spousal or child support.
Reduce Your Debt
When you apply for a mortgage, your lender will assess whether your debt is manageable by calculating your debt service ratio, which measures how much of your gross income is dedicated to paying your existing debt. If you have a high level of debt, your DTI ratio may be too high to get pre-approved, especially for a high amount.
Generally, your DTI ratio should be no more than 44%. If your ratio is higher than this, work to pay down your debt before applying for a mortgage.
Should You Spend The Full Pre-Approval Amount?
It’s recommended that borrowers apply for a mortgage that’s less than the full amount they’ve been pre-approved for.
Since a pre-approval doesn’t factor in any extra expenses and investments (such as groceries, utilities, TFSA contributions, etc), you could be pre-approved for a higher amount than what you can comfortably afford. As such, you’d be in a much better financial position if you focus on homes that are well under the maximum amount you’ve been pre-approved for.
You should not only consider what you’ll be able to afford today in terms of housing costs but also how much housing costs will be in the future. Carefully consider whether you believe that your current finances would be able to cover future housing costs.
How Much Should You Spend Relative To Your Pre-Approved Amount?
Just because your pre-approval gives you a certain amount to work with doesn’t mean you should spend that much.
Spending in the upper range will leave you with little money left over from your income to cover all other expenses related to homeownership. It will also leave you with fewer funds that could otherwise have been spent on saving for retirement, investing, or even having fun.
Carefully review your finances to make sure your other debts are still given priority. All your debts, including additional mortgage payments, should be easily covered by your income. Ideally, there should be enough left over as a financial buffer.
Consider using a mortgage affordability calculator to get an idea of how much you should spend on a mortgage.
Documentation Required To Get-Pre-Approved
You’ll have to submit some documentation to get the pre-approval process started, including the following:
- Government-issued identification
- Employment letter
- Proof of your wages (ie. paystubs)
- Letter of employment
- Proof of funds (for your down payment and closing costs)
- Statement of assets and liabilities
If you’re self-employed, you’ll need to submit the last two years’ worth of Notices of Assessment from the CRA.
Do Mortgage Pre-Approvals Hurt Your Credit Score?
Your credit score could take a hit when you apply for mortgage pre-approval. As part of the assessment process, your lender will want to check your credit score and take a look at your credit report. This is referred to as a “hard pull“. When this happens, your credit score will dip, albeit temporarily.
However, your credit score should bounce back, as long as you maintain financial responsibility.
Can You Be Denied A Mortgage Even After Pre-Approval?
Yes, you can be turned down for a mortgage even after you’ve been pre-approved, Here are a few reasons why.
You Changed Jobs
One of the criteria for getting pre-approved is steady employment and sufficient income. Your pre-approval letter is based on your current job status and income. If this changes, it could impact your pre-approval.
In this case, your lender may have to restart the pre-approval process using your new income and employment information.
You Added More Debt
Applying for additional credit products or loans will not just cause your credit score to dip but will throw your DTI ratio out of whack. Again, your original pre-approval is based on your original DTI ratio, among other things. If this increases, you may be denied a mortgage.
You Didn’t Disclose All Your Financial Responsibilities
Other financial obligations can impact your debt and income, such as child support payments, spousal support, and others. Failure to disclose these could impact your pre-approval.
The Appraisal Came In Low
If there are issues with the appraisal, your mortgage application could be denied. Part of the process involves an appraisal of the property. If the home is appraised lower than the loan amount originally offered in your pre-approval letter, your lender may turn you down for a mortgage.
It’s best to have your bank order the appraisal quickly, at least within a week or two of the purchase. This is especially important if you have a long closing. Having the appraisal done right away hedges against the risk of market volatility.
How Long Does It Take To Get A Mortgage Approval?
As mentioned earlier, the mortgage approval process can move faster if you’ve been pre-approved already. If all goes well, the average time for mortgage approval in Canada is a couple of days to a week (sometimes longer).
If there are any snags in the process, approval can take much longer. And if the lender encounters too many problems, approval can be denied altogether.
Final Thoughts
Getting a mortgage pre-approval will give you an idea of how much you can afford in a home purchase. It will also show sellers you’re a qualified buyer and help move the final mortgage process faster. You can also use a pre-approval to lock in a mortgage rate, especially if you anticipate the rate to increase soon.
