What a pre-approval does (and doesn't) do
A pre-approval is a lender's conditional review of your income, debts, credit and down payment. It gives you a realistic price range and, with many lenders, a rate hold for a set period. That protects you if rates rise while you shop, though some lenders don't offer holds and terms vary.
A pre-approval is not a final approval. Once you have an accepted offer, the lender still reviews the property (often with an appraisal), confirms your documents and checks that nothing has changed. Don't take on new debt, change jobs or move your down payment around without talking to John first.
Pre-qualification vs. pre-approval: a pre-qualification is a quick estimate based on what you say. A pre-approval is based on documents and a credit check, which makes it much more useful when you write an offer.
The mortgage stress test
To get a mortgage from a federally regulated lender, you have to qualify at the minimum qualifying rate. That's the higher of your contract rate plus 2%, or 5.25%. OSFI sets this rule for uninsured mortgages. Insured mortgages (under 20% down) use the same formula under federal mortgage insurance rules. Lenders calculate your debt-service ratios at the qualifying rate, so the mortgage you qualify for is smaller than your actual payment alone would allow. Some provincially regulated lenders, including many Alberta credit unions, aren't covered by OSFI's guideline and set their own policies.
Debt-service ratios in plain language
- GDS (gross debt service): housing costs (mortgage payment at the qualifying rate, property tax, heating and, for condos, part of the condo fees) as a share of gross income.
- TDS (total debt service): GDS plus your other debt payments, such as car loans, credit cards and lines of credit.
For insured mortgages, CMHC's guidelines cap these at 39% GDS and 44% TDS. Lenders also apply their own policies. Paying down a credit card or car loan before you apply can make a real difference.
Alberta closing costs to plan for
Your pre-approval covers the mortgage, but you also need cash for closing. In Alberta that usually includes legal fees and disbursements, Land Titles registration fees (there's no land transfer tax), a home inspection, property tax and utility adjustments, home insurance and moving costs. Alberta has no provincial sales tax, so unlike some provinces there's no provincial tax on a mortgage insurance premium. Lenders often want to see that you have enough set aside for closing costs on top of the down payment. See the closing cost breakdown.
