What is Pre-Approval?
Pre-approval is a lender's commitment to lend you a specific amount, subject to a property appraisal, title search, and final underwriting. It is not final approval, but it demonstrates to sellers that you are a serious, financially qualified buyer. In a competitive market, a pre-approval letter significantly strengthens your offer.
Pre-approval vs. pre-qualification: Pre-qualification is an informal estimate based on income and debts disclosed by you (unverified). Pre-approval involves a formal application, income verification, credit check, and employment confirmation. Pre-approval is the document that carries weight with sellers.
Pre-approval evaluates your creditworthiness and capacity to borrow, applying the stress test and GDS/TDS debt ratios. The pre-approval amount tells you the maximum mortgage you may qualify for, though you should purchase only what you can comfortably afford and that aligns with your long-term financial goals.
Documents You Will Need
To obtain pre-approval, lenders will request documentation to verify income, employment, and existing debts. The exact list varies by lender, but standard documents include:
Employment & Income:
- Two most recent pay stubs (recent as possible—within 30 days if possible)
- Last 2 years' tax returns (T1 General and Notice of Assessment from CRA)
- Employment letter from employer confirming position, hire date, annual salary, and job permanence
- If self-employed: Last 2 years' tax returns, financial statements, and CRA business confirmation
Assets & Liabilities:
- Bank statements for savings accounts (last 2-3 months) showing down payment funds
- Investment account statements (stocks, mutual funds, RRSP)
- List of all existing debts: credit card balances, car loans, student loans, lines of credit
- Proof of down payment source (savings, gift letter if gifted, RRSP withdrawal confirmation)
Personal Identification:
- Government-issued photo ID (driver's license, passport)
- Social Insurance Number (SIN)
Tip: Gather these documents before contacting lenders. The faster you provide documentation, the faster you receive pre-approval. Many lenders now accept digital scans and offer online applications.
GDS and TDS Ratios Explained
All federally regulated lenders use two key ratios to assess mortgage qualification: Gross Debt Service (GDS) and Total Debt Service (TDS).
GDS Ratio (Gross Debt Service)
GDS measures the percentage of gross monthly income spent on housing costs:
GDS = (Mortgage Payment + Property Tax + Heat + 50% Condo Fees) / Gross Monthly Income
GDS limit:Most lenders cap GDS at 32% for insured mortgages (down payment <20%) and 39% for conventional mortgages (down payment ≥20%). This means your housing costs should not exceed 32% or 39% of gross income.
TDS Ratio (Total Debt Service)
TDS includes all debt obligations:
TDS = (GDS + All Other Debt Payments) / Gross Monthly Income
Other debts include car loans, student loans, credit cards, lines of credit, and spousal support payments.
TDS limit: Most lenders cap TDS at 40% for insured mortgages and 44% for conventional mortgages. This ensures you can service all debt obligations alongside your mortgage.
Example: A borrower earning $6,000/month gross with:
- Proposed mortgage + property tax + heat = $1,800 (GDS: 1,800 / 6,000 = 30% ✓ Passes 32% limit)
- Car loan = $250, credit card minimum = $100 (Total debt: $2,150)
- TDS: 2,150 / 6,000 = 35.8% ✓ Passes 40% limit
How Long Pre-Approval Lasts
Pre-approval is typically valid for 120 days (4 months). However, the exact duration depends on the lender and whether a rate hold is included.
After 120 days: Your pre-approval expires, though you may request renewal. Lenders re-assess your credit, employment, and financial situation. If your circumstances have not changed materially, renewal is usually straightforward. However, a significant change in employment, new debt, or a credit issue may require a new application.
During the pre-approval period: Keep your financial situation stable. Avoid:
- Opening new credit cards or lines of credit
- Making large purchases on credit (car loans, personal loans)
- Changing jobs or reducing income
- Missing debt payments or allowing balances to increase
- Running up credit card balances
Any material change may require additional verification, extending the approval timeline or even resulting in withdrawal of pre-approval.
Shopping Around for Rates
You have the legal right to shop around for the best mortgage rate. Many borrowers accept their bank's rate without comparison, potentially costing tens of thousands of dollars over the mortgage term.
Where to shop: Compare rates from:
- Big 5 Canadian banks (Royal Bank, TD, Bank of Montreal, Scotiabank, CIBC)
- Credit unions (often offer competitive rates)
- Alternative lenders (Tangerine, Simplii, EQ Bank)
- Mortgage brokers (represent multiple lenders, may access better rates)
- Private lenders (higher rates, useful if you have poor credit or unusual circumstances)
How multiple pre-approvals affect credit: Each pre-approval application results in a hard credit inquiry. However, multiple inquiries within 14 days are typically counted as a single inquiry by credit bureaus (Equifax, TransUnion), so shopping around for 2-3 weeks does not significantly harm your credit score.
Compare the full picture: Do not focus solely on interest rate. Consider:
- Mortgage penalty terms (3 months' interest vs. IRD)
- Prepayment options (allowance to pay down without penalty)
- Portability (can you transfer the rate to a new home?)
- Fees (appraisal, legal, broker fees if applicable)
- Renewal terms (are you locked with the lender?)
Rate Holds and Their Duration
A rate hold is the lender's promise to lock in a specific mortgage rate for a defined period. The hold protects you if rates rise before closing; if rates drop, the lender typically applies the lower rate at closing.
Typical hold durations:
- 30 days: Short hold, useful for quick closings. Lowest-cost option.
- 60 days: Standard hold, provides time for inspection and appraisal.
- 90 days: Longer hold, common when purchasing pre-construction homes with longer closing timelines.
- 120 days: Extended hold for slower or uncertain closings.
Cost of rate holds: Longer holds may cost slightly more (typically 0.05% to 0.15% higher rate). Some lenders offer free holds up to 90 days for pre-approved borrowers.
Important: A rate hold is not a commitment to close. If you change your mind or lose the bidding war on a property, the hold expires without penalty. However, once your offer is accepted and you have committed to a specific property and closing date, the rate hold applies to your actual mortgage.
Common Pre-Approval Mistakes
Many first-time buyers make avoidable errors during pre-approval that complicate or delay the process:
1. Not Shopping Around
Accepting your bank's rate without comparison. A difference of even 0.25% saves thousands over 25 years. Always obtain 2-3 pre-approvals.
2. Overextending Your Budget
Just because you are pre-approved for $500,000 does not mean you should borrow it. Account for property taxes, home insurance, maintenance, and life changes. A comfortable purchase price is 3-4x your annual household income, not the maximum the bank will lend.
3. Making Large Purchases Before Closing
Buying a car or taking on new debt increases your TDS ratio, potentially reducing your pre-approved amount or even disqualifying you. Wait until after closing to make major purchases.
4. Changing Employment
Starting a new job during the pre-approval window creates complications. Lenders want to verify 2 years of stable income. Changing jobs may require additional documentation or delay approval. If you must change jobs, inform the lender immediately.
5. Missing Credit Payments
Even one missed payment or increased credit utilization can harm your credit score and disqualify you. Maintain perfect payment behavior throughout the pre-approval period.
6. Not Understanding the Stress Test
Some borrowers assume they can afford the payment at the advertised rate. Remember, you must qualify at 5.25%, not 3.5%. Ensure the mortgage amount feels comfortable at the higher qualifying rate.
Key Takeaways
- Pre-approval is a lender's formal commitment to lend you a specific amount, strengthening your offer in competitive markets.
- Gather income verification, asset statements, and debt documentation before applying. The faster you provide documents, the faster approval comes.
- GDS and TDS ratios determine your qualifying amount. GDS (housing costs) is capped at 32-39%; TDS (all debts) at 40-44%.
- Pre-approval is valid for 120 days. Avoid major financial changes (new debt, job changes, missed payments) during this period.
- Always shop around. Multiple pre-approvals within 14 days count as one credit inquiry, so obtain 2-3 offers without penalty.
- Rate holds protect you if rates rise. Typical holds range from 30 to 120 days; longer holds may cost slightly more.
- Avoid common mistakes: do not max out your approved amount, do not take on new debt, do not change jobs, and do not miss payments.