Mortgage Pre-Qualification vs. Pre-Approval vs. Approval

What is the difference between each?

When you consider purchasing a home, there is a lot of terminology thrown around by realtors and lenders, especially if you are a first home buyer. As a mortgage agent in Windsor, Ontario, I find that most clients do not understand the difference between being pre-qualified, pre-approved, and approved for a mortgage. Before seriously looking for a real estate property, you should make sure you understand the difference between each. If you are expecting to borrow money for the purchase through a mortgage, always make the offer conditional on financing regardless of whether you are pre-qualified, pre-approved, or even approved.

Confused? Take a few moments and read the difference between each below…

Mortgage Pre-Qualification

Getting yourself pre-qualified for a mortgage is simply learning how much home you can afford given your current income, debts, expenses, and so on. If you are pre-qualified to purchase a home worth $300,000, that means that the mortgage amount you can afford to borrow plus the amount of your down payment equal $300,000. You can determine how much you pre-qualify for by using our maximum mortgage calculator or mortgage qualifier calculator. Check out all of our mortgage calculators, as they can be very useful in getting a firm understanding of where you stand before you search for a home.

To get a better understanding, you can contact Home Mortgage Ontario to discuss your situation in further details. Often creating a monthly budget will help you determine what monthly payments you can actually afford to avoid becoming “house rich” but “money poor.” Requesting to be pre-qualified is free and there are no obligations for the borrower to follow through with a home purchase or arrange a mortgage with us. It is also important to note that a pre-qualification in Ontario does not guarantee financing by any lender; it simply helps you understand what you can mathematically afford.

Mortgage Pre-Approval

After learning a bit more about how much you can realistically afford to borrow through the pre-qualification process, most Ontario home buyers will approach a bank or mortgage broker to be pre-approved by a specific lender. Similar to the pre-qualification process, a bank or mortgage broker will collect your information and approach a lender to get a written pre-approval letter stating the mortgage amount they are willing to lend you and at a guaranteed rate for 90 to 120 days (3 to 4 months).

Information required for a pre-approval application in Ontario include:

• Personal information of all borrowers (name, birthdate, etc.)
• Current address & length at address. If less than 3-years, previous address(es) required
• Employment info & length at employer. If less than 3-years, previous employment required
• Current annual income and income type (salary, commission, hourly, etc.)
• Current assets and details (savings, investments, RRSP, TFSA, vehicles, etc.)
• Current debts, details, and minimum payments (credit card, line of credit, car loan, etc.)
• Credit score & report will be pulled to check credit worthiness
• Down payment amount you intend to put towards home purchase
• Maximum home purchase price

Once this information is collected by a bank or mortgage broker, they will submit the pre-approval application to one or more lenders. A bank will only submit to their own mortgage department and thus will have only one option, while a mortgage broker will shop the market and find the best lender for your situation at the best interest rate.

If pre-approved, the lender will give you a written pre-approval letter with terms and conditions. While this letter is comforting, there are no obligations on either side to follow through with the mortgage. The letter simply provides the borrower with comfort knowing that under these specific guidelines, the lender would see no reason why they would not lend to you. The main reason most people decide to get preapproved is to increase their confidence that they will be financed as well as to lock-in an interest rate for the next 90- to 120-days. While the rate will be slightly higher than the current quick close rates for homes closing in 45 days, it offers comfort that if rates rise, your rate will not exceed the rate indicated on the pre-approval. However, if quick close rates are lower than the pre-approval rate within 45-days of your closing date, you will receive the lower rate.

Mortgage Approval

The mortgage approval process is the final step in securing home mortgage financing for real estate. While a pre-qualification and pre-approval are suggested steps in the home buying process, they are not mandatory. Since both pre-qual and pre-approval letters require no obligation for the borrower or the lender, the mortgage approval is the most important step to being financed for the purchase of a home.

Home buyers will seek a mortgage approval after an offer on a home and a real estate purchase agreement has been signed by both the buyer(s) and seller(s). Since you do not have a firm commitment from a lender before making your offer, it is essential that you include a condition on your offer to purchase for financing. Other recommended conditions to include on your offer to purchase:

• Conditional on inspection
• Conditional on financing
• Conditional on selling your current home

Information required for an approval application in Ontario include:

• All information required for a pre-approval
• Your social insurance number (SIN)
• Purchased property details including legal description, property taxes, etc.
• A new credit check if it has not been pulled in the last 30-days
• Closing date
• Specifics regarding the type of mortgage product you would prefer

If you are approved by a lender, you will receive a commitment letter stating terms and conditions which must be met in order for them to follow through with the financing. If you agree to the terms and conditions and can provide the required documentation, you can now lift your financing condition from your offer to purchase and look forward to your closing date!

It should be noted that the lowest current rates are only offered by lenders if your closing date is less than 30- to 45-days away. However, if your closing date is in greater than 45-days and interest rates drop, most lenders will provide the lower rate at closing. Contact us to find out what current quick-close rates we can offer you. While we typically have the lowest rates in Ontario, if you manage to find a lower rate in writing, send it to us and we will find a way to beat it!

Recap: Pre-Qualified vs. Pre-Approved vs. Approved in Ontario

 
Looking to determine how much you can afford on a home purchase? Consider using our mortgage centre calculators, apply to be pre-approved using our online mortgage application, or simply contact us to discuss your plans! Remember, we offer mortgages to clients all across Ontario including Windsor, Owen Sound, London, Kitchener/Waterloo, Toronto, Barrie, Kingston, Ottawa, Thunder Bay, North Bay, and in YOUR neighbourhood! Don’t be shy, reach out and contact us today!