Author: REALTOR.ca Team
After eight successive rate hikes, the Bank of Canada held its benchmark policy rate steady to 4.5% in March 2023. As a result, some Canadians may be ready to reassess their home buying plans, which may require some mortgage shopping.
Pre-qualification and pre-approval are common terms you’ll hear in the mortgage space. While both options can be a helpful first step toward securing a mortgage loan, there are some distinctions between mortgage pre-qualification and mortgage pre-approval that are critical for borrowers to note.
What is a mortgage pre-qualification?
Pre-qualification can be a preemptive step in the home buying process, and is meant to help borrowers get a feel for the loan amount they might be able to secure. It’s typically a brief process that involves going over the borrower’s financial situation.
“Pre-qualification is a very casual calculation. It’s usually verbal,” says Harpreet Singh, a REALTOR® with Avion Realty Inc. in Markham, Ontario, and former Financial Services Representative with CIBC. “There’s no application in the system, and even if I’m checking your documentation, no third party is checking it.”
Although the lender may perform what’s called a “soft credit inquiry,” Singh says pre-qualification “has no implication” on the borrower’s credit score.
Since it’s simply a rough estimate, pre-qualification doesn’t guarantee the borrower will be approved for the loan amount quoted down the line.
What is a mortgage pre-approval?
Pre-approval is a much more formal and lengthy process. It requires a comprehensive review of income, debts, and assets. Unlike pre-qualification, it calls for a “hard credit inquiry,” so it can temporarily lower your credit score.
“It’s pretty much a full-fledged mortgage application,” says Singh. “You’re taking in all your documentation—your pay stubs, your savings account statements—into your bank and the bank will pre-approve you for a loan amount. The approval is usually good for three or four months.”
While pre-approval doesn’t necessarily guarantee a loan, it’s a more serious step in the mortgage process, and can help homeowners to close on a home faster once they’re ready to buy. Additionally, the pre-approval process can help borrowers to identify and resolve any issues with their credit.
“Let’s say you have a car loan and you have $5,000 owing on it, or you had a credit card from a long time ago that you never made the payment on. Even if it’s a very small payment, it could impact your mortgage application,” says Singh. “With pre-approval, you can rectify all those mistakes beforehand.”
In a REALTOR.ca Living Room blog article debunking common real estate myths, REALTOR® Kevin Appl, in Saskatoon, Saskatchewan, told us one of the biggest misconceptions around real estate is that it’s OK to home shop without pre-approval.
“Why would you house shop without knowing your budget?” he said. “I’ve seen this several times when a client starts to budget creep and winds up falling in love with a property that a lender ultimately can’t finance for them. It’s heartbreaking. Plus, from the perspective of a REALTOR®, we’re unable to fully serve the client since we have no idea of a shopping range, as well as how competitive that buyer will be in a multiple offer situation without financing.”
Which option is right for you?
Generally speaking, Singh recommends his clients go the pre-approval route if they’re serious about their home buying plans. Getting pre-approved can give buyers a competitive advantage in a competitive housing market, and allow borrowers to lock in a more desirable loan amount in an uncertain rate environment.
That said, there are circumstances in which pre-qualification is the better option. For instance, if the borrower is simply sizing up their options, and isn’t planning to purchase for a number of months, or if they have concerns about their credit score. “I’ll also move clients towards a pre-qualification phase if I think the application itself is very simple,” adds Singh.
In any case, whether you opt for pre-qualification or pre-approval, Singh recommends prospective home buyers work with an expert to assess which option—pre-qualification or pre-approval—is right for them. Beyond that, he cautions borrowers against holding information back when dealing with a mortgage agent.
“Buying a home is the biggest transaction of someone’s life, so it’s important to give as much information as you can to your mortgage agent,” he says. “In the end, your mortgage application is a story. The better you explain your story, the better off you’ll be.”