What is the difference between a mortgage pre-approval and a pre-qualification?

In Canada, a pre-qualification is a quick estimate of what you might borrow, based only on what you tell a lender or broker about income, debts and down payment. A pre-approval goes further: a lender reviews your credit report and supporting documents. A pre-approval is still not a commitment to lend, and the final mortgage remains subject to lender approval.

How a pre-qualification and a pre-approval each work

A pre-qualification is a conversation or an online form. You describe your income, your monthly debts and how much you have saved, and you get a rough borrowing range. Nobody checks the numbers, so a pre-qualification is useful for early planning and not much more.

A pre-approval starts with an application. The lender, or a broker on your behalf, pulls your credit report and asks for documents such as pay stubs, an employment letter and proof of your down payment. The lender then runs your numbers through its own rules, including the stress test (the check that you could still afford the payment at a higher qualifying rate). Then the lender tells you the amount it would consider lending.

A pre-qualification and a pre-approval generally use the same affordability limits. For an insured mortgage, one with less than 20% down, CMHC caps your housing costs at 39% of gross income (GDS). CMHC also caps your housing costs plus other debts at 44% (TDS). Both ratios are worked out at the qualifying rate.

Why a pre-approval is still not a final approval

A pre-approval looks at you. The final approval also looks at the property you choose. Once you have an accepted offer, the lender reviews the purchase agreement, may order an appraisal, and confirms your documents are still current. The final answer can change if:

• the appraisal comes in below the price;
• your income or debts have changed;
• the lender's rules for that type of property differ.

Keeping your finances steady between pre-approval and closing helps. Steady means no new car loan, no new credit cards and no change of job if you can avoid it.

When a pre-qualification is enough, and when you need a pre-approval

If you are a year or more away from buying, a pre-qualification or the affordability calculator is enough to set a budget. The calculator's results are estimates only, not an offer or advice; lender rules and your full file decide.

When you are ready to make offers, a pre-approval is more useful. A pre-approval surfaces problems early, such as an error on your credit report or income a lender will not count, while there is still time to fix them. We usually start with banks, credit unions and monoline lenders (lenders that only do mortgages), and compare how each would treat your income.

What to do next

If you want to know where you stand before you start viewing homes, use our call-me-back form and we will walk through your numbers with you. You can also read how our pre-approval process works.