People often get confused between pre-approval, pre-qualification, and approval. In this article, we will explore the differences between these three things.
Pre-Approval:
A pre-approval is simply a rate hold. This is the confusing part for most people, as the term itself suggests that you have been approved. If you walk into a bank and ask them for pre-approval, they will issue you one based on the information you have provided to them, without verifying if you actually qualify for the amount you have asked for. Pre-approvals will hold a rate for you for 90 to 120 days depending on the lender. This can help prevent you from possible rate hikes. However, the pre-approval you have obtained can be cancelled, or nullified if the terms of the pre-approval change in any way. If the purchase price, mortgage amount, income, or any other material changes occur, the lender has the right to void your rate hold. This is another advantage of working with a broker, as a qualified professional will know the different policies for the different banks regarding pre-approvals, as they each have different rules. If you’re curious to know more about the different policies regarding pre approvals, please reach out to us and we can go over them together.
Pre-Qualification:
A pre qualification is something that you can’t obtain from a bank. You will have to use a broker in order to know if you qualify for your purchase price or not. The banks do not have the manpower to review your entire application with you. A broker will ask you for your income documentation, your down payment source, and review your credit. Unless your income is very high in comparison to the purchase price you are seeking, you can’t be sure that you can qualify for your purchase price unless your application has been reviewed by a broker.
Approval:
An approval happens once you have an accepted offer to purchase, and you have a signed purchase and sale agreement in hand. Once that is obtained, your broker can submit your application, and your deal officially “goes live”. Once your file has been submitted, the lender will review the application and should issue a commitment within 1-3 business days. This commitment represents your approval. Once this commitment is signed by you, you now have an agreement between you and the lender for the mortgage amount that has been requested. The next steps will be provided to you by your broker, and after that, all that’s left is the process with your lawyer to close the purchase, and then you own your own home! Yay!
The Bottom Line:
A mortgage pre-qualification can be useful as an estimate of how much someone can afford to spend on a home, but a pre-approval is much more valuable.
A big part of what a pre-approval means is that your credit has been checked and your income has been verified with the appropriate income documentation approved.
In this way, a mortgage pre qualification can be useful as an estimate of how much you can afford to spend on a home and is a helpful starting point to determine what you can afford but carries no weight when you make offers.