Pre-qualification vs pre-approval: what each one tells you

In Canada, a pre-qualification is a quick estimate of what you might borrow, based only on what you tell a broker or lender, with nothing verified. A pre-approval goes further: a lender reviews your credit, income, debts and down payment, and usually holds a rate for a set period. Neither a pre-qualification nor a pre-approval is a commitment to lend; a pre-approval is still subject to lender approval of the property you choose and verification of your documents.

What a pre-qualification is

A pre-qualification is a conversation, often a short one. You share your income, debts and down payment, and the broker or lender runs the numbers to estimate a price range. Nothing is checked: a pre-qualification usually involves no credit report, no documents and no rate hold.

A pre-qualification is useful early, when you are deciding whether to start looking at all, or comparing neighbourhoods. Because nothing is verified, the estimate is only as good as the information behind it. If you are unsure about your income, debts or credit, the real figure could be different.

What a pre-approval involves

A pre-approval is a lender's review of your application before you have found a home. A pre-approval usually involves:

1. A full application with your income, employment, debts and assets.
2. A credit check, with your consent.
3. A calculation of what you qualify for, including the stress test, which tests your payments at a higher rate than the one you will pay. See the mortgage stress test explained.
4. Often, a request for supporting documents such as pay stubs, an employment letter, tax documents and proof of your down payment.
5. Usually, a rate hold.

The result of a pre-approval is a maximum mortgage amount and a set of conditions. A pre-approval gives you a much firmer idea of your price range than a pre-qualification, and a pre-approval can make your offer more credible to a seller.

When you apply, provide documents through the lender's or broker's secure application process. Do not send identification, your SIN or account numbers by ordinary e-mail.

Why a pre-approval is not a commitment

A pre-approval is not a promise to lend. The lender has not yet seen the home you will buy, and the lender may not have verified every document.

Once your offer is accepted, the lender reviews the property, often with an appraisal (an independent estimate of the home's value). The lender checks your documents and confirms that nothing has changed. Only after reviewing the property and your documents does the lender issue a commitment, the lender's formal approval with its own conditions.

Because a pre-approval is not a commitment, many buyers make their offer conditional on financing. The financing condition gives buyers time to get the lender's final approval. Buyers remove the financing condition only once the commitment is in hand and they and their lawyer are satisfied with its terms.

What a rate hold is

A rate hold means the lender agrees to hold a particular interest rate for you for a set period while you shop. Rate holds are commonly 90 to 120 days, depending on the lender.

If rates go up during the hold period, you generally keep the held rate. If rates go down, ask how your lender handles a drop; policies differ from lender to lender.

A rate hold has limits. A rate hold applies only to the lender that issued the hold, usually only to the product you were pre-approved for, and only if you close within the hold period. If the hold expires before you buy, you will need a new pre-approval at whatever rates apply at that time.

What can undo a pre-approval

A pre-approval is a snapshot of your situation on the day you applied. If your situation changes before closing, the lender can change its answer. Common reasons a pre-approval does not turn into a final approval include:

• A change in your job or income: a new job with a probation period, a move from salary to commission or self-employment, or a reduction in hours.
• New debt: financing a car, furniture or appliances, or running up credit card balances, raises your total debt service ratio.
• A drop in your credit: missed payments or new credit applications between pre-approval and closing.
• Documents that do not match: income or down payment that cannot be verified as stated.
• The property itself: an appraisal that comes in below the purchase price, a property type or condition the lender will not finance, or a purchase price above your approved limit.
• An expired rate hold: if you buy after the rate hold ends, you are re-qualified at the rates of the day.

Between pre-approval and closing, keep your finances as steady as you can. Talk to your broker before you change jobs, take on new debt or co-sign anything.

When to get a pre-qualification and when to get a pre-approval

A pre-qualification makes sense when you are a year or more away from buying and want a rough idea of your range.

A pre-approval makes sense once you are actively looking, ideally a few months before you expect to make an offer, so your rate hold covers your search. If your search runs longer than the hold, a broker can help you renew the pre-approval or apply elsewhere.

What to do next

If you are ready to start looking, or want to know where you stand first, use our call-me-back form and we will be in touch. You can read more about getting pre-approved or estimate your range with the affordability calculator. All approvals are subject to lender approval.