Looking to get pre-qualified for a mortgage? Or wait, should you get pre-approved instead? If you’re like most people, you find the two terms confusing. Not knowing the difference between being pre-qualified and pre-approved could cost you your new home!
Here is the difference
A mortgage pre-qualification allows a buyer to get an idea of what they may qualify to purchase. All the information in the application is provided to the lender verbally by the client. A mortgage lender takes all of the information as close to accurate as possible. Everything is provided by estimates and for information purposes only. Supporting documents are not reviewed, nor required. Clients who are confident in their credit history, income and debt levels, and don’t want their credit ran just yet, are usually comfortable with a pre-qualification.
We recommend taking your mortgage pre-qualification one step further. There could be unknown issues with your credit or inconsistencies with income and payment amounts. It is better to apply for a mortgage pre-approval.
A mortgage pre-approval is similar to a pre-qualification in that the buyer has an idea of price range to shop in, but supporting documents are provided and reviewed upfront. Supporting documents allow the mortgage lender to verify all of the information and make sure it is correct. It is also a requirement to have a credit bureau pulled to make sure all of the monthly payments are accurate and the credit is satisfactory.
The pre-approval will also secure a rate and help buyers shop for a home with confidence. This puts the buyer in an advantageous position when dealing with a seller, as he or she will know the buyer is much closer to obtaining mortgage approval.
Please keep in mind that a pre-approval should never be considered the final mortgage approval. High ratio mortgages (mortgages with less than 20 percent down payment) need to be approved by both the lender and the chosen insurer. The insurer provides default insurance that protects lenders in the event a borrower defaults on their mortgage. Since the risk falls onto the insurer, they provide rules and guidelines for lenders to follow. Lenders do not send mortgage pre-approvals to the insurers, only live deals. Not only do the lender and the insurer (if applicable) have to approve the borrower, they also have to support the home being bought. The mortgage application is reviewed in greater depth once an offer is made on a property.
Always take the advice of your real estate agent and include the condition “subject to financing” on the purchase contract. Assuming no surprises pop up with the property you are buying, the mortgage will be approved. An unconditional mortgage approval will be provided.
Now that you know the difference between being pre-qualified and pre-approved for a mortgage, you can communicate to your real estate agent where you stand in the finance process. As always, contact a member of our team if you have any questions.