Pre-Qualified vs. Pre-Approval

Friday Apr 30th, 2021

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Pre-Qualified.

Purchasing a home can be intimidating, confusing, and involves a lot of research. Would-be buyers have to look into different neighbourhoods, schools, transportation, home prices, market trends and then there are the requirements needed to fulfill getting financing. Income, down payments, credit scores, the list goes on.

As a potential homeowner, you need to make a budget. I know it sounds like a no-brainer, but you would be surprised how often this is overlooked.

Two of the first steps of obtaining of a mortgage are the pre-qualification and the pre-approval processes. Both have been mistaken for the other and it is confusing, especially for first-time homebuyers.

What does it mean to be Pre-Qualified?

The process can best be described as the more casual estimated version of pre-approval. 

To get pre-qualified the potential buyer needs to provide general financials including their income, assets, and debts to the prospective lender. This does not require a credit check.

The lender will assess the information and provide an estimated projection of the amount of mortgage the potential homeowner will be eligible to receive. This is preliminary and the number provided is subject to change. The main benefit is to give the potential homeowner a general idea of what to expect. Although in today's market this would not apply in prior markets a letter of pre-qualification might comfort the seller if the purchase is conditional upon the buyer obtaining satisfactory financing.

What does it mean to be Pre-Approved?

This is the natural next step in the process following pre-qualification. Once the potential homeowner is serious about buying this process should be undertaken. It provides the borrower with a more precise amount of money that they can expect to be approved for.

This is a more detailed process and could take a couple of weeks to complete.

A full mortgage application will need to be completed. Documents required;

  • list of assets,
  • debt,
  • income,
  • proof of employment,
  • proof of capital to pay closing costs(see my next post),
  • expenses and financial obligations including;
  • child and/or spousal support,
  • student loans,
  • lines of credit,
  • car loans/leases,
  • credit card balances.

Lenders will want to verify your income, you will need to provide the following;

  • Recent pay stubs to verify your wage or salary
  • Employment letter from your employer, documenting the length of employment and salary
  • Notice of Assessment from the CRA if you own your own business

Keep in mind it is possible to get more than one pre-approval by exploring different options;

  • From different lenders
  • This means each lender will conduct a credit check
  • Note, these soft credit checks will not afford your credit score

Interest Rates and Rate Holds

Getting a pre-approval will give you a better idea of what interest rate you will be able to get. You may be able to lock in the rate. This is known as a rate hold. This only relates to fixed-term, not variable-term mortgages. Obviously, the benefit of locking in a rate is in the event that rates go up before you find your perfect home.  Rate holds are usually between 60 to 120 days, depending on your lender and your application. Rate holds do not guarantee approval of obtaining the mortgage. You could still be refused based on many criteria, including changes in your financial situation.

Main differences between pre-approval and pre-qualification.

  Pre-Qualification Pre-Approval
Credit check Not required

Required

Interest Rate Interest rate estimate but not guaranteed Locked in fixed interest for up to 120 days
Documentation General answers about the borrower's financial situation are accepted without extensive documentation. Extensive documentation on borrower's finances, credit check, debt obligations, and employment required.
Level of reliabilty Rough estimate on the mortgage amount. Calculated estimate on mortgage amount with written commitment from a lender.
Length of process 1-4 days Varies between a few days to 2 weeks.

Should you get a pre-approval or a pre-qualification?

It is helpful to obtain both through the different stages of the mortgage process.

When should a consumer get a pre-approval?

  • Should consider obtaining a pre-qualification at the earliest point when considering purchasing a home.
  • Allows the potential homebuyer time to consider their budget while obtaining insights into lenders' options as well as their own needs, wants, and goals.

When should a consumer get a pre-approval?

  • When they become more involved in the home buying process.
  • Ideally within 3 months of the anticipated purchase date
  • Take advantage of the rate hold.
  • Not so much nowadays, but in normal markets, it will strengthen the offer in the event of a bidding war.

The process of obtaining a mortgage can be overwhelming and I recommend that a buyer obtain an experienced real estate agent that has reliable contacts with multiple lenders, both mortgage brokers, and institutional lenders.

Please read my upcoming article on budgeting.

Thank you for reading. 


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