Does a Mortgage Pre-Approval Guarantee Your Loan in British Columbia?

You have found a lender who says you are pre-approved, and you are starting to look at homes in British Columbia. It is easy to treat that letter as money in the bank. Many buyers feel the hard part is over once they have it.

In fact, a pre-approval is a useful planning tool but a limited one. This article explains what it does, what it does not do, what to ask your lender, which documents you will usually need, and why it should not be the only thing protecting you when you make an offer.

This article covers the law of British Columbia.

What a pre-approval actually is

When you ask for a pre-approval, the lender reviews your assets, income and debt to estimate the most it might lend you and at what interest rate. The process does not mean you are certain to be approved for a mortgage.

Think of it as a early read on your borrowing power. It helps you set a realistic price range and see what your payments might look like. It is not the same as a final mortgage approval on a particular home.

Why the lender can still say no

The pre-approved amount is a ceiling, not a commitment. The amount you are actually lent depends on the value of the property and on your down payment.

• The property has to meet the lender's standards, and the lender can still refuse after pre-approving you.
• The final loan may be lower than the pre-approved figure if the property is valued lower than the price you agreed to pay.
• Terms are set by each lender. You are not bound to that lender to close your purchase, but the lender is not firmly bound to lend to you either.

That last point works in both directions. You can shop around, but you cannot treat the pre-approval as a binding promise from the lender.

The rate hold and questions to ask

Many pre-approvals include a rate hold, where the lender locks in a rate for a period. FCAC says that period can run from 60 to 130 days depending on the lender. Because each lender sets its own terms, read the details of yours.

FCAC suggests asking these questions before you rely on a pre-approval:

• How long is the pre-approved rate guaranteed?
• Will you automatically get a lower rate if rates fall?
• Can the pre-approval be extended if you have not found a home in time?

Ask for the answers in writing where you can, so you know exactly what you are relying on.

Documents lenders usually ask for

Lenders typically ask for the following when you apply for a pre-approval:

• Identification.
• Proof of employment.
• Proof of your down payment and your closing costs.
• If you are self-employed, two years of CRA notices of assessment.

Having these ready can speed things up. Requirements can differ between lenders, so ask yours for its exact list.

Down payments and mortgage insurance

Mortgage loan insurance is typically needed if your down payment is less than 20% of the purchase price. A lender may also require insurance even if you put down 20%, usually if you are self-employed or have a poor credit history.

Insurance protects the lender, not you, if you cannot make payments. The lender pays the premium but will likely pass the cost on to you, and you can pay it as a lump sum or add it to the mortgage. Raise this early, because it affects how much cash you need and what your final loan looks like.

What to do before you make an offer

A pre-approval is a ceiling rather than a commitment, and the lender can still refuse after pre-approving you. That makes it worth thinking carefully about how financing is handled in your offer before you sign.

• Gather your documents before you apply, and keep them current.
• Write down the rate hold period and the date it ends.
• Ask the lender the three FCAC questions about guarantee, rate drops and extension.
• Check whether mortgage insurance is likely to apply to you.
• Have a real estate lawyer review your contract of purchase and sale, and the wording of any financing condition, before you sign.

How financing should be handled, and how long any condition should run, depends on your situation and the property. A lawyer can explain your options before you commit.

Frequently asked questions