Pre-Qualification vs. Pre-Approval
A pre-qualification is an estimate based on self-reported financial information. It means very little. A pre-approval is a conditional commitment from a lender based on verified income, credit, and debt documentation. In a competitive GTA market, only a pre-approval carries weight with sellers and their agents.
What Lenders Evaluate
Canadian mortgage lenders assess four main factors:
- Income verification: T4s, pay stubs, Notice of Assessment, and employment letters for salaried borrowers. Self-employed borrowers typically need two years of T1 Generals, financial statements, and potentially a CPA letter.
- Credit score: Most A-lenders require a minimum score of 680. Below 680, you may be directed to B-lenders or private lenders at higher rates.
- Debt service ratios: Your Gross Debt Service (GDS) ratio — housing costs divided by gross income — should not exceed 39%. Your Total Debt Service (TDS) ratio — all debts divided by gross income — should not exceed 44%.
- Down payment source: Lenders verify that your down payment comes from legitimate sources: savings, RRSP (HBP), FHSA, gifted funds (with a gift letter), or proceeds from a property sale.
The Stress Test
All federally regulated lenders in Canada must qualify borrowers at the higher of: the contract rate plus 2%, or 5.25% (the benchmark qualifying rate). This means if your actual mortgage rate is 4.5%, you must qualify at 6.5%. The stress test significantly reduces your maximum purchase price compared to your actual affordability.
How Long a Pre-Approval Lasts
Most pre-approvals are valid for 90 to 120 days and include a rate hold — the lender guarantees a specific interest rate for that period. If rates drop during your rate hold period, most lenders will offer you the lower rate. If rates increase, you're protected at your locked rate.
If your pre-approval expires before you find a property, you'll need to reapply. Financial circumstances can change, so don't assume a renewal is automatic.
Documents to Prepare
Gather these before contacting a lender or mortgage broker:
- Government-issued photo ID
- Most recent pay stub
- T4 slips (two years)
- Notice of Assessment (two years)
- Employment letter (stating position, salary, and start date)
- Bank statements showing down payment (90 days)
- List of all debts (credit cards, car loans, student loans, lines of credit)
Mortgage Broker vs. Bank
A mortgage broker has access to multiple lenders and can shop your application to find the best rate and terms. A bank can only offer its own products. In general, working with a broker gives you more options and often better rates. The broker's fee is typically paid by the lender, not by you.