Buying a house is quite a challenging task. And we are talking not about finding a peaceful place to live with good neighbors, and not even about the huge sum of money that you need to spend. We’re talking about the fact that not everybody can afford it in one payment, taking a mortgage. To be sure that everything goes smoothly with the mortgage you need to receive tons of papers, including pre qualification vs pre approval about which we are going to talk today.
Pre Qualification process
Let`s first state that we are dealing with a mortgage in Canada. What is the mortgage? (Surprised that you still do not know that, but we will remind it to you with pleasure!). The mortgage is the sum of money that you borrow from a bank to purchase real estate. During the transaction, the bank agrees to transfer the title of the property to you after you make the required payments.
The process of pre-qualification for a mortgage in Canada is, essentially, an assessment of your ability to pay for a property utilizing a mortgage. You are asked about your salary, living expenses, and credit history. If you are pre-qualified, the bank estimates how much you are able to borrow in the mortgage.
This is the initial stage in the process of obtaining a mortgage. During it, you work with a mortgage consultant who gathers your income information, for example about the salary. Based on these data, he or she will determine if you can afford a mortgage loan, take out a home equity loan, or cash-out refinance.
If you are pre-qualified by your bank, that doesn’t mean that right after this you will be pre-approved! You can get an offer for pre-qualification from other lending companies as well.
This process goes first because it is easier to get, but it is less profitable too. It can be said that it is a light version of pre approval. But what does it mean to get pre qualification vs pre approval? During pre-qualification your lender needs to receive the following information from you:
- general financials
However, you can forget about the credit check for now. Why? Because you need to pass this step during the earliest home buying times. It can be in the form of an online meeting or phone call, so put your suit back into the closet, you will need it later.
Why do you need mortgage pre-qualification? You need it to see how much budget your mortgage will eat, whether you can afford it or not. Plus, you can show the lender that you are fed up with dreaming of sitting on the old couch in the rented flat and you are serious about buying this home.
The pre-qualification process can result into:
- a letter of pre-qualification
- financing approval
- condition of purchase
You need these papers only to back up this reaffirmation with supporting evidence. If we are talking about mortgage interests, unfortunately, you can not secure it, because during pre-qualification you receive only approximate information.
Pre-Approval, Rate Holds, and Interest Rates
Now we will pass to the more interesting and official part in our pre qualification vs pre approval battle. Unlike pre-qualification, pre-approval has a time limit within 90 to 120 days. Moreover, it provides the lender with more specific information about your overall financial condition.
- You will need to provide general information
- Complete the required paperwork (including copies of all your personal documentation)
- Pay the necessary fees (if any)
- The specific lender may suggest some modifications to your financial situations
Why is it important? Because it means that you are qualified for interest rates. Plus, you can choose how long you want to wait for your mortgage approval; the rate holds up if you give it earlier, down if you give it later. You can even benefit from this process. For example, general interest rates are lowered for certain periods of time (depending on the amount applied), up to 12 months, usually equal 1% per month.
But what about interest rates? What are they? Interest rates are the amount of money that you are charged by your lender for borrowing money. It means how much interest, expressed as a percentage of the amount of money you borrow.
Interest rates go up or down depending on many factors, including customers’ behavior. For example, if customers tend to repay their debts faster, the rate goes down. Another example — if customers tend to take a longer time to pay back their debts, the interest rate goes up. How much does pre approval vs pre qualification process cost you? Nothing! It is given free of charge in order to evaluate your financial situation and creditworthiness.
For pre-approval, you should collect a list of documents according to the Financial Consumer Agency of Canada (and you can even get your suit out of the closet again, you need it right now), complete a full mortgage application, and stay patient because, unlike pre-qualification, pre approval can take several weeks.
This is the list of documents that you need to provide if you are pre-approved:
- 2 years of personal financial statements
- income information
- list of assets and debts
- signed covenants that you would normally sign with your lender during the mortgage approval process
- your contact details (address, phone number, email)
And now, you are ready for an official confirmation. But there is even more! Pre-approval also results in rate holds up. Rate holds are mortgages where the interest rate can be raised if money is not paid. Interest rates for pre-approved mortgages are higher than for pre-qualified mortgages because lenders request more information about their customers who have just passed this stage. Rate holds also mean a premium interest rate for you.
Which One Should You Get a Pre-Approval or a Pre-Qualification?
Now let’s decide which one you should get: a pre-approval or a pre-qualification? Who is the best in the pair of pre qualification vs pre approval? It all depends on your personal financial situation. If you are sure that you want to buy a home, you should consider getting at least pre-approval, because it will help you save some money if rates drop.
But if you do not know whether you can afford this mortgage, pre-qualification will be good for you because any changes in interest rates during this time won`t matter for your decision-making process. Either way, make sure that your lender is trustworthy and has the proper license to give mortgage services in the area.
Main Differences Between a Pre-Approval and a Pre-Qualification Processes and Their Results
We already discussed pre qualify mortgage and pre approved loan in a detailed way, and there we will place a table so it will be easy for you to compare them.
|Length of Process
|Varies between a few days to two weeks
|General answers about borrower’s financial situation
|Extensive documentation on 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
|Estimated interest rate, but not guaranteed
|Locked in fixed interest rate for up to 120 days
So, now it is time to sum up all the information about pre qualification vs pre approval.
- Your mortgage stays approved within 90-180 days (depending on your situation)
- The more specific information you provide the better, so you will do well with your finances
- If the conditions of your mortgage are not met, the rate will go down
With the right steps and a little luck, you can find a nice home in Canada.
And don’t forget about the suit you have waiting for you in your bedroom! Good luck with finding your first home!