Often times first time home buyers assume that mortgage pre-qualification is the same as loan pre-approval. This is not the case. There are different stages in the mortgage approval process.

The first stage in the mortgage approval process is the pre-qualification stage. A mortgage broker or financial institution will gather financial information about the home owner to assess your current financial situation (sources of income and debt) in order to provide you with an indication of how much of a mortgage you can afford to have. As this is only an assessment, there is no contract or commitment to the home owner. If you are serious about being a home owner, then the pre-qualification stage is a critical step in being able to determine if affordability of a home is even possible.

Usually some of the financial information that a lending institution will ask you for consist of tax returns for the previous two years, pay stubs, proof of employment, loans and debt and a credit report. It is important to include not only all sources of income but also all financial obligations that you have such as child support, back taxes owing and car payments. Failure to be transparent with the lender will only risk this pre-qualification stage. The goal should be to provide a two year financial scenario which shows consistency and little fluctuation so a home owner should work towards this goal in order to satisfy the lenders pre qualification checklist.

Once a pre-qualification is completed, this simply means that the lender has provided you with an interest rate assessment (how much risk you are) which rate will be held for a period of between 30-120 days. This interest rate hold is based on a number of conditions attached to this pre-qualification stage even before this stage is approved.

The second stage in the mortgage pre-approval process is where the mortgage lender reviews the application and agrees to provide you with a mortgage amount at a determined interest rate which are based on the terms of the contract. This stage involves a more vigorous check of your financial situation (including those that are self employed) including your credit history and this time it involves the mortgage broker pulling the credit information and not the lender. Some of the information that may be requested during this stage are personal identification, salary confirmation, all sources of other income, bank accounts and debt information and proof of funds for down payment. Once all information is validated only then will there will be an interest rate hold which is typically between 60 to 120 days that this lender will guarantee this interest rate lock.

Benefits of Pre-Qualification and Pre-Approval

  • Ability to lock in interest rates early can lead to significant savings especially when rates may increase
  • It signals to the seller of a home that you have serious intentions of buying a home
  • Provides you with a clear picture of how much you can afford in mortgage payments
  • Provides you with peace of mind that you have met the “criteria of the lender
  • For a serious home buyer, it propels them to take the necessary steps to structure their finances and make adjustments necessary so that they do not stretch themselves