Are you ready to buy your first home? Like many Canadians, you may dream of one day owning a home. After years of hard work and saving, maybe you feel ready. As a new homebuyer, you will face an overwhelming amount of information and new terms. Some of these terms seem similar, and hard to keep straight. Today we are going to talk about two of those terms and how they help your mortgage application process: Your pre-qualification and pre-approval.
On your mortgage journey, it is likely you’ve come across the terms “pre-qualification” and “pre-approval”. If you’re new, these terms seem incredibly similar and can be additionally challenging when people use these terms interchangeably. You may find yourself wondering how a pre-qualification and how a preapproval is different and if they are important. This post should help you to determine what both these terms mean and their significance. This will also help you understand the importance of being prepared!
What is a pre-qualification?
A prequalification gives you an estimate of what you can be approved for without needing a credit check. You can easily do this over the phone or online with your mortgage broker. The purpose of this estimate is to give you an idea of your financial readiness. As well as to provide the necessary documents to your broker to support this estimate.
When starting your relationship with a mortgage broker, they will often pre-qualify you to make sure you have a good understanding of what to expect. This step is important because it will prevent the heartache that comes when you find that perfect home that is outside of your price range. You should consider getting a pre-qualification before reaching out to a real estate agent.
If you plan on starting your house hunt and have a good idea of what you can afford, your mortgage broker will work with you to get pre-approved, allowing you to lock in a mortgage rate.
What is a pre-approval?
You should consider a pre-approval a rate hold, rather than the guarantee of mortgage approval. This rate hold usually lasts for 90 – 120 days. Therefore, giving you time to explore the market before making an offer on a home. A rate hold usually means that a lender is willing to review your application further based on the financial details that you have provided to your Broker. The rate hold protects you in the event that rates go up but will still allow you to access lower rates if they are available at the time you make an offer. It is important to note that if your financial position changes, you may not qualify for this rate when you submit your application.
The preapproval process will check your credit score and present your current financial position to the lender. Though a pre-approval will not guarantee a mortgage, it will give you a maximum purchase price that you can work with. Once you have a pre-approval in place, you can start your house hunt with more confidence!
There is a more in-depth conversation of pre-approvals here, which should answer in-depth any questions you have on pre-approvals specifically. I’ve also written a post about why you should get a preapproval here.
Why should I bother with both?
Even though, on paper, a pre-qualification and pre-approval are similar and require many of the same documents, starting with a pre-qualification saves you time, heartaches, and headaches. If you’re starting your mortgage journey soon and wondering what your first step should be, consider meeting with a mortgage broker for a pre-qualification. This will usually depend on whether you are considering buying a home soon or just trying to understand what you need to do to prepare for purchasing a home in the future.
You should consider a pre-qualification as soon as you start thinking about buying a home. The earlier you start this process, the sooner you can prepare for the application process. This includes planning, budgeting, and saving for your down payment. The more information you have access to, the more comfortable you will be during the buying process.
Every item in your tool-box is important when you are making a commitment such as buying a new home. Getting pre-qualified is as easy as scheduling a call with your mortgage broker. If you’re considering purchasing a home and would like more information about the mortgage process, feel free to get in touch with me here!