Lining up the financing before buying a home is a major undertaking. With housing costs soaring in cities across North America, most people are struggling to get the funds together.
Even if you get help from the bank of mom and dad, you’ll need to get the bank or another lender on board, too. Once you begin this process, you’ll see there are a few stages you’ll pass through.
“Mortgage pre-qualification” and “pre-approval” might sound alike, but there are important distinctions home buyers must know.
What is a Mortgage Pre-Qualification?
First, some background. A mortgage pre-qualification is an initial assessment that gives lenders a broad idea of who you are, which in turn tells them who they might lend to. The pre-qualification phase, also known as mortgage preauthorization, may have different criteria depending on the lender.
Generally, they want you to know the maximum amount of a mortgage you qualify for, your estimated mortgage payments, and lock in an interest rate. They want to get a picture of the risks they’re taking lending to you, which may involve providing personal information about your level of income, debt, and finances.
The digital innovator Regan McGee, whose real estate technology platform Nobul has transformed how people today buy and sell homes, describes the difference in an interview: “prequalification doesn’t mean much. Your mortgage lender doesn’t have to follow through and approve the loan. Many people assume that they are going to get financing because they are pre-qualified. That’s not always the case.”
The main thing to note is that the lender isn’t obligated to the client at this point. Whatever information you provide, the mortgage approval is only tentative. It’s a way for financial institutions to profile you and for you to get a better appreciation of what your mortgage will look like.
However, there are no commitments. Using Nobul can save buyers considerable money, as incentivized agents offer some free bonus services and cash back.
How Does Mortgage Pre-Approval Differ?
A mortgage pre-approval is different because the lender actually follows through and verifies the financial information you provide. Getting pre-approval means the lender will commit itself to loan your money, barring a property valuation and other conditions.
The terms can still change, as pre-approval doesn’t officially lock in the rate, as circumstances may still change between the time that you’re pre-approved and the date you’re actually ready to make a purchase.
It’s handy to have it lined up, though. The market moves quickly, and if your dream home suddenly becomes available, you’ll need to move swiftly. Getting your financial ducks in a row at the outset can speed up the process and help you land the home you’ve been looking for.
In cities across North America, housing has become vastly more expensive. With inflation making groceries cost more and the interest rates from the bank rising, homebuyers need to do everything possible to improve the health of their finances. The pre-qualification and pre-approval are distinct processes, but hopefully, they’re both quick preludes to finding a home you love.