You’ve probably heard the terms “pre-qualified” and “pre-approved” when it comes to getting a mortgage. But are they two ways of saying the same thing? Or do they differ?
Both processes are important to the mortgage process, but one holds more weight than the other. Let’s compare getting pre-qualified vs pre-approved and see how each plays a role in getting a mortgage.
Key Points
- Pre-qualification is a more casual process that will give you an idea of what price you can afford and involves your lender reviewing your current finances.
- Pre-approval is a more serious and formal process and takes things a step further than pre-qualification, including a hard credit check.
- Both processes are important in the mortgage application and approval process and should be done before you start looking at prospective homes.
Pre-Qualified Vs Pre-Approved
Two of the first steps of the mortgage process are the pre-qualification process and the pre-approval process, both of which have historically been mistaken for the other and cause confusion, especially to first-time home buyers. But while they both sound similar, they differ somewhat. That said, each process plays a key role when applying for a mortgage.
What Does It Mean To Be Pre-Qualified?
The mortgage pre-qualification process can be described as a more casual, estimated version of a mortgage pre-approval. To get pre-qualified, you would provide your general financials, including your income, assets and debt, to the prospective lender.
It’s important to note that the pre-qualification process does not require a credit check. A credit check is only required after you’ve applied for a home loan.
The lender will assess the information and provide you with an estimate on how much of a mortgage you can afford.
Pre-qualification is preliminary, and the mortgage amount the lender provides in this stage is subject to change.
Benefits Of Getting Pre-Qualified
- Find out what you may get approved for. A pre-qualification letter will give you an idea of how much of a mortgage loan you may qualify for based on the information you provide your lender.
- Gives your lender a chance to discuss your options. Despite the more precursory nature of the pre-qualification process, it’s a great opportunity for you to have conversations with your lender about your specific mortgage needs. It also gives your lender the opportunity to share insights and mortgage options that they feel might be more suitable to your needs.
- Easy process. The pre-qualification process can be completed quite casually, meaning a phone call or online assessment is often adequate to obtain a pre-qualification.
What Does It Mean To Be Pre-Approved?
Obtaining a mortgage pre-approval is a natural next step following a mortgage pre-qualification, but should only be done when you’re more serious about buying. A mortgage pre-approval provides you with a more precise amount of money that you can expect to be approved for.
The process is more detailed, taking more time to complete (up to a couple of weeks), and requires you to complete a full mortgage application and provide a variety of documents, as documented by the Financial Consumer Agency of Canada, including your:
- Assets
- Debt
- Income
- Identification
- Proof of employment
- Proof of capital to pay closing costs
- Expenses and financial obligations, including:
- Child or spousal support
- Student loans
- Lines of Credit
- Car loans
- Credit card balances
Moreover, lenders may require a few documents to verify your employment, including:
- Recent pay stubs to verify your wage or salary
- Employment letter from your employer, documenting the length of your employment and salary
- Most recent 2 years’ worth of personal tax returns and Notices of Assessment from the CRA if you own your own business
It’s also possible to get more than one pre-approval by exploring different options from different lenders. Although this means each lender will conduct a credit check, it’s important to note that these are soft credit checks that will not affect your credit score.
Pre-Approval, Interest Rates And Rate Holds
Obtaining a pre-approval can give you a better idea about what the interest will look like on your mortgage. You can lock in an interest rate, also known as a rate hold, through your mortgage pre-approval process, though this relates to fixed rates, not variable rates. The benefit of locking down a rate is if your lender’s fixed rate goes up between your pre-approval and approval, you are safely locked into your pre-approval rate.
Rate holds are usually valid for 60-day, 90-day, or 120-day periods, depending on your lender and your application. It’s important to note, however, that a rate hold doesn’t guarantee your approval of the mortgage. You can still be refused based on many types of criteria they have that they feel you weren’t able to meet, including changes in your financial situation.
How Long Is A Pre-Approval Valid For?
Although validity periods of pre-approvals vary by lender, most potential homeowners will be approved for between 90 and 120 days. Sometimes, lenders will even offer extensions on your pre-approval period, though you will need to resubmit your financial documents again to do this. Nonetheless, the pre-approval period gives you a minimum of 3 to 4 months to seek out your new home.
Benefits Of Getting Pre-Approved
- Understand what you can afford. When you’re out house hunting, you can focus only on properties that don’t exceed your financial limits. Knowing what you can get approved for will give you a better idea of your affordability and allow you to better budget during your search for a home.
- Lock in your interest rate. As mentioned, you can lock in your rate when you get pre-approved for a fixed-rate mortgage, which is beneficial if you expect interest rates to increase in the near future. Do note that this is applicable only to fixed rates, and not variable rates.
- Strengthen your credibility as a buyer. Getting pre-qualified is great, but getting pre-approved proves a stronger case about your financial health and creditworthiness. Sellers like to see buyers who are pre-approved. This shows that you’re not only serious about buying, but you’ll likely not have an issue getting a mortgage to buy the home.
- Speed up the mortgage approval process. Getting pre-approved will put you one step closer to final mortgage approval. You’ll get much of the mortgage process out of the way by getting pre-approved. As long as nothing has changed with your financial situation and the home you plan to buy is worth what you’ve offered, the process should be carried out with little issue.
Main Differences Between Pre-Approval And Pre-Qualification
While pre-qualifications and pre-approvals both provide mortgage amounts that a borrower can reasonably expect to be approved for, the two processes have a number of differences. The following chart compares getting pre-qualified vs pre-approved:
| Pre-Qualification | Pre-Approval | |
| Credit Check | Not required | Required |
| Length of Process | 1-4 days | Varies between a few days to two weeks |
| Interest Rates | Interest rate estimate, but not guaranteed | Locked in fixed interest rate for up to 120 days |
| Documentation | General answers about the borrower’s financial situation are accepted without extensive documentation | Extensive documentation on the borrower’s finances, credit, debt obligations, and employment required |
| Level of Reliability | Rough estimate on mortgage amount | Calculated estimate on mortgage amount with written commitment from lender |
Should You Get Pre-Approved Or Pre-Qualified?
It’s helpful to obtain both a pre-qualification and pre-approval, albeit at different stages of the mortgage process.
When Should A Consumer Get A Pre-Qualification?
Prospective home buyers should consider obtaining a pre-qualification at the earliest point of time when considering purchasing a home. This allows the homebuyer to consider their budget while obtaining insight into a lender’s options, as well as their own needs and goals.
When Should A Consumer Get A Pre-Approval?
Prospective home buyers should consider obtaining a pre-approval when they are more involved in the home buying process, ideally within 3 months of the expected purchase date of their new house. This is because pre-approvals last up to 120 days in most cases. A pre-approval will also strengthen a potential homebuyer’s offer in a bidding war if the sale is conditional on financing.
Pre-Qualification And Pre-Approval Do Not Guarantee Mortgage Approval
Getting pre-qualified or pre-approved for a mortgage does not mean that you are guaranteed to get final mortgage approval. Instead, they’re both preliminary steps in the mortgage process and are designed to help you estimate your budget when house hunting. They also give your lender an idea of the type of borrower you would be.
While pre-approval is not a promise, it is one step closer to final mortgage approval than pre-qualification. Since your pre-approval is based on your current financial situation and credit score, and a specific loan amount and interest rate, any changes in these factors could require the mortgage process to start over.
Final mortgage approval means your offer on a home has been accepted, your mortgage contract is finalized, and the funds have been transferred.
How To Get Pre-Qualified Or Pre-Approved For A Mortgage
Getting pre-qualified or pre-approved for a mortgage in Canada can be quick and easy if you apply online and use a loan aggregator to compare lenders and loan products. To get pre-qualified or pre-approved, follow these steps:
Find lenders online. Using a service like Loans Canada can help you find dozens of top lenders in Canada within seconds. You can get pre-qualified with multiple lenders and compare rates and fees. If you decide to take the extra step to get pre-approved, a hard credit check will be required.
Make sure you meet eligibility criteria. Different lenders have slightly different lending requirements. Find out what you need to qualify for a mortgage, such as credit score and debt-to-income requirements.
Gather required documents. When you get pre-qualified, you’ll be asked to supply information about your income, assets, and debt. If you get pre-approved, you’ll need to provide more information and documents to back this information, such as proof of employment, bank statements, and statements of assets and debts.
Apply online. Getting pre-qualified is very quick. All you need to do once you’ve answered some questions is click ‘submit’, and you can be pre-qualified instantly. Then, you’ll receive an estimate of what may be qualified for, along with estimates of potential monthly mortgage payments.
For mortgage pre-approval, you’ll typically get a response in minutes when applying online. Lenders will review your financial profile to gauge how much you can afford based on the information you provide. Then you can get started with the home-buying process.
Should I Make An Offer With Only A Pre-Qualification?
Technically, you could put in an offer if you’ve only been pre-qualified and skip the pre-approval. However, you could be missing a crucial step in the process, as you’ll have less to go on in terms of whether your lender will approve you for a mortgage.
Real estate agents typically recommend getting pre-approved as sellers often frown upon offers from buyers who are not pre-approved. It’s best to get pre-approved for a mortgage since you’ll have to go through this process eventually anyway. Plus, it can help streamline the sale process and lower the chances of getting turned down for a mortgage.
Things To Avoid After Getting Pre-Approved
Your pre-approval is based on your current financial situation and credit profile. But if anything changes, you could sabotage your qualifications needed when you make a purchase. Once you get pre-approved, make sure you avoid doing the following:
Don’t Apply For New Credit
One of the main factors involved in your pre-approval is your debt load. If you apply for new credit after you’ve been pre-approved, you’ll be adding more debt to the pile.
That extra debt could throw off your qualifications for the loan amount you were originally pre-approved for. If your lender sees a change in your debt, you could be denied a mortgage once you’re ready to buy a home.
Don’t Make Any Large Purchases
If you buy an expensive item that requires thousands of dollars of your liquid cash, you could be depleting your assets. Again, your assets play a key role in your pre-approval. If you drain some of these assets before you apply for a mortgage, you may find that you won’t be approved for as much as you may have been pre-approved for before.
Don’t Switch Jobs
Your mortgage pre-approval is based on your current job title and income. If you change jobs, that likely means a change in income, which could affect the amount you’re allowed to borrow.
Plus, switching jobs means you’re starting over with your new employer, which might mean less job stability. Lenders like to see some stability with an employer, so consider switching jobs after you’ve been approved for the mortgage.
Paying Your Bills On Time
Your credit plays an important role in your ability to get a mortgage. And bill payment history is the most important factor when it comes to your credit score. Make sure you continue to keep up with your bill payments to avoid any issues with your credit profile before you seal the deal on a home.
Do I Have To Apply For The Entire Pre-Approved Loan Amount?
The dollar figure on your pre-approval letter represents the maximum amount you can get approved for when you buy a home and apply for a mortgage. But that doesn’t mean you need to spend that entire amount. In fact, it’s suggested that you spend a little less than your pre-approved limit.
There are lots of other expenses related to owning a home, so you want to make sure that you leave a little extra in the pot. Plus, having a financial cushion to fall back on can be very helpful, especially if you find yourself in a financial emergency at some point.
Final Thoughts
Learning the difference between pre-qualification and pre-approval is an important step to keep you on top of your financial planning and strengthen your offer on a home. Before you start pounding the pavement in search of a new home, take some time to get pre-qualified or pre-approved to find out how much you can afford in a home purchase.
