What actually counts when you make an offer

When you write an offer, the useful fact is not the heading on a lender letter. It is what has already been checked: proof of income, current debts, credit, the qualifying rate, and the still-unseen property. A prequalification answers whether a budget can exist on paper. A preapproval answers whether a file has been reviewed far enough to name an amount and conditions. Neither one is the final yes on the mortgage.

The word on the letter is not the file

The Financial Consumer Agency of Canada says the process may be called preapproval, prequalification or preauthorization, and that lenders attach different definitions and criteria to each step they offer. Asking "am I preapproved" therefore settles almost nothing. Two letters with the same title can rest on opposite foundations: numbers spoken on a call in one case, pay stubs, notices of assessment and a credit check in the other.

The practical questions are plainer. What was provided. What was verified. What maximum amount was calculated, at which qualifying rate, and until which date a negotiated rate can still be held. If the letter does not answer those points in writing, the heading does not help the seller, and it does not help you.

The agency also states that this process does not guarantee mortgage approval. The figure on the page is a ceiling, not a promise to fund.

A prequalification prices a budget it has not proven

In ordinary use, a prequalification starts from what you tell someone: income, debts, planned down payment, target price. It can be a conversation or a web form. It is useful for drawing a range before you tour. It does not prove that the income a lender will keep is the figure on the T4, that the card balance it will count is the one on the statement, or that the down-payment cash will still be there on offer day.

That is why so many prequalifications break when the documents arrive. A stated salary sometimes includes uneven overtime, which a lender may set aside. A self-employed borrower who quotes last year's sales then meets the notices of assessment for the past two years, which the agency lists as employment proof in that case. The gap changes the denominator of the ratios.

A prequalification is still a sound early step. It stops you touring beyond reach. It should not appear in an offer as proof that financing will close.

A preapproval reviews the borrower, not yet the house

A preapproval, when the word is used with care, goes further. The agency says the lender looks at your finances, asks for documents and likely runs a credit check. It is looking for the maximum it may lend and for a rate. It may lock that rate in for 60 to 130 days, depending on the lender. The window is not standard. Read the end date on the letter, and what happens if rates fall while the hold is running.

The documents are the point of the exercise. Identification, proof of employment, proof you can cover the down payment and closing costs, assets, debts. Our article on down payment and cash to close separates minimum equity from the cash that still has to show up at the notary. A preapproval that skips legal fees, inspection, transfer tax and moving costs inflates the affordable price by the same amount.

Even then, the property is not in the file. The agency is explicit: a lender can still refuse the mortgage after a preapproval, including where the home does not meet its standards. A condo with heavy fees, or an appraisal below the offer price, is not the same product as the house used to size the letter. Final approval is about you and the building.

The amount on that letter is not calculated from the payment you will actually write. Banks must test the file at the higher of 5.25% and the negotiated rate plus 2%, for insured and uninsured mortgages alike, as the agency explains in its page on preparing for a mortgage. Our stress-test guide walks through that choice. For an offer, the distinctive trap is a prequalification run at the contract rate. That is not the number the lender will use.

A worked example: the amount fits, then the file breaks

Suppose a household earns $96,000 a year before tax, or $8,000 a month. It is looking at a $450,000 property with $45,000 down, so a $405,000 loan over 25 years. Property tax is $280 a month and heat is $140. A quick conversation, with no debt statements, leaves them thinking the project clears.

Use an illustrative contract rate of 4.50%. That is not an offer, only a number to show the mechanism. The real payment would be about $2,242. With tax and heat, housing costs are $2,662, about 33% of income. The household treats $450,000 as a reasonable offer.

The stress test uses 6.50%. The qualifying payment then rises to about $2,713. Tested housing costs become $3,133. The agency says total housing costs should not exceed 39% of gross income, which is $3,120 here. Tested GDS sits near 39.2%. The file is already on the line, before any other debt.

The household also has a $450 car loan that never came up on the call. The agency puts total debts, housing included, under 44% of gross income. Forty-four percent of $8,000 is $3,520. Add the car and the tested total is $3,583, about 44.8%. The file that "passed" at the contract rate, with the car omitted, fails the rule as soon as the statements arrive. An offer written on that basis then depends on a financing condition, a lower price, more equity, or paying down the non-housing debt.

The same household that, between the letter and the offer, finances a car or spends part of the down-payment account runs this math again. The preapproval has not changed its name. The file has.

What breaks between the letter and the offer

A 60-to-130-day rate hold has an expiry date. After that date the held rate is no longer the rate on the file. The agency suggests asking whether the hold can be extended, and whether a drop in rates during the window applies on its own. An offer whose financing condition outlives the letter leaves the household exposed to a new qualifying rate, and therefore to a new tested payment.

The property can also sink a file that worked on the borrower. The agency notes that each lender sets its own guidelines, and that the home has to meet them before the loan is approved. A condo that puts half its fees into GDS, or a low appraisal, can cut the amount or close the product.

Credit and income are not frozen. The agency says a lender will look at the credit report before approving. Opening a card, financing furniture, changing jobs or watching commissions stop is not paperwork. It is a new input to TDS and to the denominator behind the 39% and 44% caps.

What to line up before you sign an offer

Have the step named in writing. Which documents were seen. Whether credit was pulled. What maximum amount was calculated, at the qualifying rate. When the rate hold ends, and what happens if rates move. If the letter does not hold those facts, it is not yet an offer tool.

Then gather the pieces the agency lists: identification, employment, down payment, closing costs, debts. For self-employment, two years of notices of assessment. Confirm that the down-payment money is not the same cash earmarked for a car. Run GDS and TDS at the qualifying rate with the real debts.

Set the offer price below the ceiling. The agency is blunt: the preapproval amount is a maximum, and looking in a lower range keeps the budget from being stretched. If the building is a condo, put the fees back into the math before you sign.

A financing condition in the purchase offer remains the backstop, even with a careful letter. It recognizes that the property has not been underwritten yet. An offer with no condition, backed only by a prequalification, puts on the household a risk the lender has not accepted.

The useful work is to set the printed word beside the documents actually received, the qualifying rate and the hold's end date. The label on the letter does not settle the offer. You can start a prequalification to get those facts on the table, then decide whether the file is documented enough for a purchase offer. A first conversation is free and does not commit you to a lender.

Certain conditions may apply. Subject to change without notice.