Finder is committed to editorial independence. While we receive compensation when you click links to partners, they do not influence our content.
How to get preapproved for a mortgage
What you need to know to start your homebuying process on the right foot.
If you’re house-hunting and have a preapproval letter in-hand, you’re already a cut above others who might be looking at the same property. And getting preapproved for a mortgage isn’t as daunting as it might seem. The key is to know exactly what to expect and what documents you’ll need.
- Compare rates from 30+ lenders
- Safe and simple application
- Referral bonus available
Apply today and compare rates from 30+ banks and lenders, with rates ranging from 2.54% - 4.99%.
- APR range: 2.54% - 4.99%
- Lender type: Broker
- Loans offered: First & Second Mortgages, HELOC, Bridge
- Fees: Service is free for prime mortgages
- Min. credit score: 600
How do I get preapproved for a mortgage?
To get the ball rolling with your homebuying process, start with these four steps:
- Check your credit score. You should know where you stand before getting preapproval. Most lenders look at your credit score before approving you for a mortgage. Aim to have a credit score of at least 660, while scores 759 or higher usually qualify for the best rates. The minimum credit score to get a mortgage depends on the type of loan you’re getting.
- Calculate your debt-to-income (DTI) ratio. Your DTI reveals if you can afford the monthly mortgage payment. Most lenders want your total debt, including your new home loan, to be no more than 43% of your total income. To find your DTI, divide your total amount of recurring monthly debt by your gross monthly income. Note that recurring monthly debt typically only includes monthly payments that show up on a credit report, including credit cards, car payments and student loans.
- Find a lender. Banks, credit unions and online financial institutions are the most common types of lenders. Talk to more than one so you can compare rates, fees and loan options.
- Get preapproved. Fill out some personal information and provide all necessary documents and information to your lender.
What is a mortgage preapproval?
A mortgage preapproval is a letter from a lender stating a specific monetary amount that they are willing to lend you for the purchase of your home. This is based on a number of factors, including your income, debt and credit score.
A mortgage preapproval is not a promise that you’ll get a loan. It’s a statement that your lender has evaluated your finances and is willing to finance your purchase.
Difference between prequalification and preapproval
The terms “prequalification” and “preapproval” are often used interchangeably. It really depends on how your lender defines the first step in its mortgage process. Both prequalification and preapproval provide useful information about how much you may be able to borrow.
Prequalification generally refers to an informal evaluation of your finances. You provide the lender with information about your income, assets, credit and debts. The lender doesn’t verify this information, but uses it to estimate whether you can qualify for a mortgage and approximately how much you can borrow. If you’re confident about your finances, you might skip prequalification and go straight for a preapproval.
Preapproval is much more involved and requires documentation. Unlike prequalification, lenders verify your income, assets and liabilities during preapproval. Lenders will also pull your credit, which may temporarily drop your credit score. But preapproval typically holds more weight to sellers and realtors.
Benefits of getting preapproved
Getting preapproved is beneficial for several reasons. Most importantly, you’ll have an accurate idea of how much you can actually afford to spend on a new property. Having a preapproval letter can also give you an advantage over other buyers.
Bringing a preapproval letter to a buyer or real estate agent shows that you’re prepared and serious about making a purchase. It proves that you can get a loan for at least the asking price of the house or property.
Requirements to get preapproved
Here’s what lenders look for during the preapproval process:
- Proof of income. Lenders want to make sure you have enough income to afford a new monthly mortgage payment.
- Proof of assets. If you have any assets like stocks, bonds, savings accounts, retirement accounts or equity in another property, your lender will want to see the documentation for them.
- Employment verification. Lenders ask for verification of employment in the form of pay stubs and your most current Notices of Assessment. If you’re self-employed, you’ll need to provide at least 2 years of tax returns to verify your income.
- Residence history. Lenders may ask for proof of your residency for the past 2 years. This could be a letter from your landlord if you rent, or proof of your current mortgage if you already own a home.
Other documents you may need to provide
Most lenders will require these documents when you apply for a mortgage:
- 3-6 months of bank statements
- T1, T4 or T4A statements of income
- Notices of Assessment from the most recent income tax returns
- A valid driver’s license or Canadian passport
- Divorce papers to use alimony or child support as qualifying income
- Gift letter, if funding your down payment with a financial gift from a relative
- Third-party bank statements, if someone else pays for a considerable amount of your debt, such as parents paying for your student loans
What if I’m self-employed?
Self-employed borrowers are treated a bit differently than other borrowers. You’ll need to have at least 2 years of tax returns that show your business income. If you’ve only been self-employed for one year, most lenders won’t preapprove you unless you have significant alternative sources of income, a cosigner or a spouse who could put the home in his or her name.
You’ll also need to show proper documentation, such as T1 tax returns and T4A forms.
Keep in mind that any business expenses that you write off for tax purposes are deducted from your total income, which can put you at a disadvantage when applying for a mortgage. While you should take advantage of eligible tax write-offs for your business, you may want to pick and choose what you write off if you know you’ll be applying for a mortgage. Speak with a tax professional before making any decisions.
I’m preapproved. Now what?
Once you’re preapproved, keep a close eye on your finances until the entire mortgage process is complete. Any changes to your financial situation from the time you’re preapproved to the date of your closing can impact your ability to finalize the loan.
- Avoid changes in income. Don’t quit or change jobs in this timeframe.
- Avoid accumulating new debt. Now is not the time to buy a new car or finance living room furniture.
- Make payments on time. Late or missed payments affect your credit score, and a lower credit score might affect your mortgage eligibility.
- Stay in touch with your lender. Keep your lender in the loop when you’re ready to make an offer on a property, especially if any numbers have changed since you last spoke.
Compare mortgage providers
Getting preapproved for a mortgage is a helpful first step in the home buying process and can help you edge out the competition. But it’s important to do your due diligence ahead of time to help make the process as smooth as possible and ensure that you get the best rate and terms available.
Frequently asked questions
More guides on Finder
RBC Bank U.S. Mortgages Review
Get the support you need to navigate purchasing a home south of the border with this reputable US mortgage provider.
Spring Financial Personal Loan review
Secure a Spring Financial personal loan of up to $15,000 with a quick online application or phone call.
FlexMoney installment loan review
FlexMoney provides installment loans for as little as $500 up to $15,000. Get funding within 24 hours.
These high-profile funds offer sizable returns, but are riskier than most other types of investments. Here’s what you should know before investing in a hedge fund.
A guide to US mortgages for Canadian citizens
A complete guide to US mortgages for Canadian citizens.
Easy Financial creditplus loan review
If you have bad credit or no credit history at all, Easy Financial’s creditplus loan helps you improve your credit score so you can secure a loan within months.
Cash Money Installment Loan review
If you’re in a financial emergency and need to get your hands on cash quickly, Cash Money provides installment loans of up to $10,000.
Loans after a consumer proposal
Find out how you can get approved for a loan even after filing for a consumer proposal.
Easy Financial Unsecured Loan review
If traditional lenders aren’t an option, Easy Financial helps you with unsecured loans of up to $15,000.
Ask an Expert
You must be logged in to post a comment.