As much as buying a house is a dream come true, it is also a complicated experience. It involves lots of different stages from searching and finding a house to looking for various neighborhoods, approaching banks and creditors for a mortgage loan, and completing all the legal formalities. One of the most important things while buying a house is applying for a mortgage. Now there are two stages of applying for a mortgage: the first one is prequalification and the second one is prequalified. In this article, we will see the difference between pre-approved vs pre-qualified.
What Does Pre-qualified Mean?
First, we will talk about pre-qualified mortgages. A pre-qualification is a term that is used quite casually. It doesn’t involve checking the credit score because you don’t need to give too much information. For getting pre-qualified for a mortgage, all you need is the following details.
General financial information like,
- Income
- Debt
- Prospective Lender
Your lender will assess your application and based on your income sources and your debt, it would provide you with a pre-qualified mortgage status. Though you need to remember that being pre-qualified does not guarantee you that you will get a loan of the same amount it is subjected to change.
Benefits of Pre-qualified Mortage Loan
- Applying for a pre-qualified mortgage will allow you to have a thorough conversation with your lender and share what you are looking for, what is your budget, and what will suit you.
- It will provide you with a typical idea of how much mortgage loan you would be qualified for when you actually apply for it in the future.
- It saves your time when you are buying a home.
- A lot of time having a loan pre-qualified is a term for buying a house because it suggests that as soon as you apply for a house, the closing clause can be done faster and the homeowner selling you the house can rely on you.
What Does Pre-approved Mean?
Let us have a look at pre-approved now from pre-approved vs pre-qualified term. This process is quite complicated because it involves you actually applying for a mortgage and getting it approved. This process can take around two to three weeks. It will also give you an idea of how much exact amount you will be approved for by your mortgage loan.
To follow this process, you will have to fill out an actual mortgage application and submit all the documents listed below.
- Your Debt Information
- Total Assets
- Identification
- Your Annual Income
- The Proof of Employment
- Proof of Capital for Covering the Closing Costs,
- Your Expenses and Other Financial Obligations such as: Student Loan, Car Loan, Child or Spousal Support, Credit Card Balance, Line of Credit.
In addition to this, the lender you are applying for a pre-approved mortgage loan may also ask you to submit the following documents.
- Employment letter from your employer stating your employment length and salary
- Notice of Assessment from the CRA in case you are a businessman
- Your recent salary or wage slip to verify the same
One thing you can do is get more than one mortgage loan pre-approved by applying to more than one lender. The lender may check your credit score, but as these checks will be soft checks, it will not hamper your credit score.
Read: Canada Mortgage And Housing Corporation (CMHC): What is It?
Benefits of Pre-approved Mortgage Loan
- When you apply for a pre-approved mortgage loan, it will give you an idea about how much amount you will be sanctioned as well as what your interest rate will be.
- It will give you an estimation of how much monthly installment you will have to pay.
- You can also block the interest rate you are getting at the time of applying for pre-approval; it is called a date hold. It will block that fixed rate for you so when you finally fix on a house, and if the interest rate is increased you will still have to pay the old lower rate. Though please note that this is a fixed rate interest, and not variable one.
- It provides you with the safety and the time value of money.
- The rate hold applies for various periods of time like 60 days, 90 days, or 120 days. It largely depends on the lender you choose and your application form.
You need to understand that if you get a rate hold, it doesn’t mean that you have got guaranteed approval of your mortgage. There are various different criteria that you may not meet and that can cancel your mortgage application.
Once you get a pre-approval, it can hold the status for 90 days to 120 days. In some cases and depending upon the lender, you may also get a mortgage extension but you will also have to resubmit your documents. Overall, you will still have 3 to 4 months to look and finalize on a new house after getting your mortgage loan pre-approved.
Read: First Time Home Buyer Programs in Canada
The Difference Between Pre-Approved vs Pre-Qualified
The below are the main points that differentiate pre-approved vs pre-qualified. It would provide you with the idea of what you would get into if you apply for any of this.
| Pre-qualified | Pre-approved | |
| Process Timing | Between 1 to 4 days | Between a few days to around 2 weeks |
| Credit Score Checking | Not needed | Needed |
| Preciseness | Gives a rough estimation of the mortgage amount | Gives a precise and calculated amount for the mortgage |
| Interest Rates | Gives an estimation of interest rate | Gives a precise rate of interest and locks the fixed interest rate for around 120 days |
| Documents | General financial information; nothing too detailed | Documents on finances, debts, assets, credit, employment, etc. |
When Should You Apply for Pre-Approved vs Pre-Qualified?
This question may arise when you are buying a house and if this is your first-time experience.
For a Pre-qualification
When you consider purchasing a house or when you think that it is the right time or that in near future you are going to buy a house, you should apply for a pre-qualification. This would provide you with a budget and options that are in your budget while conversing with your lender and you can manage your finances accordingly.
For a Pre-approval
When you are sure of buying a house or are near the date of buying a house (around 3 months), you can apply for a pre-approval of a mortgage loan. Note that pre-approval can hold its status for around 3 to 4 months, so plan for a pre-approval in a way that it falls within your purchase date of the house. It would also strengthen your application process among other competitors for buying the house of your dream and turning it into a home!
Read Canadian Real Estate Market: The Income Required For A Home In Canada’s 10 Largest Cities
Conclusion
Buying a house can be challenging and you should plan for it in advance, whether it is about saving for a down payment, applying for a mortgage loan or managing finances for closing costs. It is also important that you choose a lender that you are familiar with and you can trust because that will decide your house buying experience. I hope this article has helped you clear your doubts. All the best!
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