Pre-Qualified, Pre-Approved, Approved: What does it all Mean?
There are different stages of approval process when you apply for a mortgage and it’s important to know what they are and what they really mean.
What is Pre-Qualification?
This is the first stage in the approval process. This is the step where your mortgage broker looks at your total income and debt and gives you a rough idea of how much you can afford to borrow, or in other words, the amount of money that you would qualify to receive from a lender.
The broker will calculate your affordability by looking at your debt ratios (Gross Debt Service GDS and Total Debt Service (TDS)).
Once you have a pre-qualification in hand, this often means that you have a rate hold for 30-120 days. However, this is not a guarantee. There will be a number of conditions attached to the pre-qualification before it is fully approved. At this stage the lender hasn’t even seen your mortgage application.
What is Pre-Approval?
This is where the mortgage lender reviews the application (in part or in full) and agrees to provide you with the funds at a set interest rate, based on the terms of the contract. Pre-approvals sometimes involve a more thorough check of your credit history and documentations (this is usually the mortgage broker pulling the credit check, not the lender).
If you are working directly with a bank mortgage specialist, you will typically jump right to this stage in the approval process.
Once the institution validates your information they will provide you with a certificate of approval, this typically comes with a rate hold of up to 120 days.
Rate Hold: The length of time, typically between 60 and 120 days, that a lender will guarantee a loan's interest rate once you are locked in.
Again, a pre-approved mortgage is not a guarantee of being approved for the mortgage loan. You will need to meet all of the terms and conditions before approval is granted.
What is Approval?
This is your golden ticket. You have been fully approved for the home loan at the interest rate outlined in the contract.
Benefits of Pre-Qualification and Pre-Approval
Getting pre-qualified and pre-approved is a very important step when looking for a mortgage. Here’s why:
- It allows you to lock in an interest rate, which is great if you expect rates to increase
- It provides additional security in knowing that you meet the initial requirements.
- For homebuyers, with a mortgage pre-approval in your pocket, you’re letting the seller know that you’re a serious buyer that means business.
- You know exactly what you can afford when you’re buying a home
Documents Needed for a Pre-Approval
When you get to the pre-approval stage, here’s what you’ll need to show your bank or broker:
- Personal identification - including driver's license and proof of address
- Income details – including employment and salary confirmation (in the form of a letter from your employer)
- Details about any other income sources
- Info about bank accounts, loans and other debts
- Proof of financial assets
- Verification of the down payment and funds to cover the closing cost – the down payment must be a minimum of 5% of the purchase price, and the closing costs usually come up between 1.5% and 4% of the purchase price