Buying a pre-construction condo is exciting - you get the chance to secure a brand-new home, often at today’s prices, before the building is even completed. But one step that surprises a lot of buyers is the developer’s requirement for a mortgage pre-approval. Buyers always try to get out of it because you have to provide financial details, but it is one of the best ways to protect your pre-construction investment, so don’t skip it!

What is a Mortgage Pre-Approval?

A mortgage pre-approval is when a lender reviews your financial situation, things like your income, debts, employment, credit history, and down payment savings, and confirms how much money they’re willing to lend you for a home purchase. A pre-approval is a soft approval that essentially says if you were going to get a mortgage today, then based on your current financial position this is what you would qualify for today. A “hard” credit check to verify your true credit score and details is not typically done, so it won’t affect your credit. Better still is that there is no cost for a mortgage pre-approval so you have nothing to close!

It usually includes with:

A maximum purchase price you qualify for
An estimated interest rate (sometimes locked in for a short period)
An outline of your monthly payments
A pre-approval letter you can show to sellers or developers

It’s important to remember that a mortgage pre-approval is not the same as a final mortgage approval and you will still need to requalify at closing based on your situation then. It is an important step in the pre-construction purchase process, as it provides knowledge but is just a non-binding piece of paper.

Why Is A Mortgage Pre-approval Important:

A mortgage pre-approval is a critical step in the pre-construction purchase process because it is:

1) Provides Proof That You Can Afford the Condo

A mortgage pre-approval is essentially a lender’s way of saying, “Based on your current financial situation, you should qualify for a mortgage up to a certain amount today.” For developers, this is proof that you’re financially capable of completing the purchase once the condo is built. It gives them confidence you won’t walk away when closing time comes.

This is very useful because you should not buy a $500,000 property if you only qualify for a $200,000 mortgage - I can tell you that this is going to end in disaster!

2) Highlights Potential Issues

A mortgage pre-approval will highlight potential problems with your mortgage application now, which allows you to make an information decision about whether to more forward with the purchase and if you do, it gives you time to address issues like:

Bad Credit
Lack of Down-payment
Lack of Income
Outstanding Loans
High Debt Ratios
Residency Status
Ownership Structure

3) Required for Most Pre-Construction Purchases

Pre-construction condos can take years to complete, and developers don’t want to take risks with buyers who might not qualify for financing later. By showing a pre-approval, you demonstrate that you’re a serious and qualified purchaser. This makes your agreement with the builder stronger and less likely to fall through. Plus developers usually have to request mortgage pre-approvals because it is typically a requirement for their own construction financing.

4) Helps You Plan Your Deposits

Most pre-construction purchases require staged deposits of 15 - 20% of the purchase price, paid in installments over several months or years. A pre-approval helps you budget with confidence, knowing that you’ll be able to secure financing for the remaining balance when the property is ready.

5) Protects Against Rising Interest Rates

Some lenders will allow you to “lock in” an interest rate for a certain period with a pre-approval. While you’ll likely need to update your approval closer to the closing date, this early step gives you a clearer picture of your potential monthly payments, helps you plan for the future, and can help avoid rising interest rates.

6) Reduces the Risk of Default

If you aren’t able to secure financing when the condo is completed, you could lose your deposit and face legal and financial consequences. Developers usually require a pre-approval as it lowers their default risk and chances of buyers not closing. It benefits both themselves and helps protect buyers.

How to Get A Mortgage Pre-Approval

A mortgage pre-approval isn’t just a formality when buying a pre-construction property - it’s an essential part of the new home purchase process I recommend to all of my clients. It protects you from surprises, strengthens your agreement, and gives developers the assurance that you’ll be able to close on your future home. Getting pre-approved early will save you stress and ensure you’re fully prepared for one of the biggest investments of your life.

If you walk in to your local bank branch, they likely won’t be experienced with providing pre-construction mortgage pre-approvals, so start by talking with a bank or mortgage broker that specializes in pre-construction mortgage pre-approvals.

Contact me if you would like a referral to an experienced mortgage broker that knows exactly what you need.