March 20th marks the first day of spring. It also marks the first day of the spring real estate market.
Spring is a great time to go out and look at properties. It’s the time when there’s traditionally the best selection of properties on the market for sale. But before you start looking at properties, it’s important to make sure you have your mortgage financing in order.
Many of us toss around the terms “pre-qualified” and “pre-approved” like they’re one and the same. While they’re both related to buying a home, they aren’t the same. Let’s take a look at the difference between being pre-qualified and pre-approved for a mortgage.
Being Pre-Qualified
If you’re toying with the idea of buying a home, getting pre-qualified is a good first step. When you get pre-qualified, the lender will ask you for basic information on your income, assets and debts. It will then do its own calculation to determine how much you qualify to borrow by way of a mortgage.
Being qualified doesn’t take very long. It can be done in under 10 minutes. Oftentimes, you won’t even have to visit the bank to do it. You may be able to do it online from the comfort of your home.
While being pre-qualified is helpful, it’s important to recognize that it only goes so far. For instance, it usually doesn’t include a credit check. It’s mainly used to give you a rough idea about how much you’d qualify to borrow for a mortgage.
If you’re serious about buying a property, you might skip the pre-qualification and go straight to being pre-approved, which we’ll talk about next.
Being Pre-Approved
Think of being pre-approved as the next step up from being pre-qualified. When you’re pre-approved for a mortgage, you’ll often get something in writing from the lender.
Being pre-approved is similar to being pre-qualified, except you’ll provide more information. You’ll typically provide a lender with permission to pull your credit, notices of assessment for the last two years, pay stubs, a letter of employment and financial statements as proof of your down payment.
By providing all this information, the lender can provide you with a more accurate mortgage pre-approval amount. This gives you the confidence to go out and look at properties. When you see a property that you like, you can make an offer knowing that your mortgage financing is likely rock solid.
Your lender will often provide you with a rate hold. A rate hold means the lender is securing a specific mortgage rate for you for a period of time (often 3 months). This can protect you if mortgage rates go up while you’re looking at properties. If that happens, the lender should provide you with the lower rate of your pre-approval.
While being pre-approved is helpful, it’s important to understand that you aren’t guaranteed the mortgage. The missing piece of the puzzle is the actual property. The lender needs to see the property that you’re buying before they’ll approve the mortgage. Chances are your mortgage will be approved, but it’s not guaranteed. As such, you might want to make any offers on properties conditional on financing to provide yourself with that much more piece of mind in case any issues arise.
About the Author
Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedIn, Twitter, Facebook and Instagram.
