Pre-qualification vs. Pre-approval: Understanding the Difference

A borrower(s) can choose one of two techniques to get qualified when looking for a mortgage. One is a Pre-Qualification and the other is a Pre-Approval. These two terms are often misused and cause a lot of misrepresentation. Let’s see if we could understand the difference between the two.

Pre-Qualification is a term meaning a Mortgage Professional has taken preliminary information from the borrower(s) and is able to approximately calculate affordability but has not formally verified any of the information. A Pre-Qualification simply denotes that a process has not yet been underwritten to the guidelines of a particular lending institution. With a pre-qualification, a borrower will provide their employment, income and asset information, as well as, liabilities to determine the amount of current monthly obligations. In addition, a borrower(s) are asked about their general credit worthiness and asked for their social insurance number or other identifiers. Based on this quick analysis the borrower will be informed as to their pre-qualification amount.

An example of this, if the borrower makes $15/hr. or $2600/month this is then calculated to an industry standard ratio of debt to income, for example 42% (TDS). Therefore, if a borrower makes $2600/month they would be pre-qualified for a total monthly mortgage debt of $1092 per month. This includes any other monthly obligations: Car Payments & Minimum Credit Card Payments, Line of Credit Payments, etc.; along with the proposed payment of principal & interest, taxes and ½ Condo/Strata Fees. This  equates to an approximate mortgage amount of $195,750.00 based on a 5.39% interest rate, compounded semi-annually, amortized over 35 years. If the borrower(s) have $10,000.00 for a down  payment, this would translate to an approximate purchase price of $205, 750.00.

When the borrower locates a home and an offer is accepted by the Seller. It is at this point, the Mortgage Professional may discover additional financial liabilities not disclosed by the borrower in the initial Pre-Qualification process which may affect the approval of the deal.

A Pre-Approval is significantly more involved than a Pre-Qualification. Similar to a Pre-Qualification, all documentation/information that is requested is verified. Furthermore, a Pre-Approval actually involves obtaining a credit report, verifying employment income and obtaining other documentation deemed necessary. Once all the above information has been collected, an application is submitted to a lender for a Pre-Approval. An underwriter at the Financial Institution reviews the application and advises if the application is approved or declined. The whole process can be quite time consuming; however, it will make the whole transactional process run much smoother and without delays. It should be noted, that a Pre-Approval simply approves the clients’ credit worthiness and is still subject to the property being accepted by the lender. Once the borrower(s) purchase a property, typically you have a shorter turnaround time for an Approval since most of the documentation/information has been previously verified.

Benefits to obtaining a Pre-Approval:

* The borrower knows exactly how much he/she can afford.

* The borrower has an advantage in multiple offer situations. Having the Borrower(s) Pre-Approved

provides an advantage over someone who is not Pre-Approved. The offer presented could provide

much more consideration then an offer from a buyer who does not have a pre-approval. .

* Pre-Approvals are valid for up to 120 days, and can be extended if required. A simple requalification

may be necessary.

* Pre-approvals provide Rate holds up to 120 days.

Any Realtor or Mortgage Professional will always recommend their clients to obtain a Pre-Approval when looking for a home. Allow yourself the opportunity to shop with confidence.

Dino Nunno, Broker License # M08004164

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