Buying a home can be a complex process, so you’ll need to get up to speed with many different terms that will be used. For first time home buyers especially, there are often a lot of similar questions that come up around mortgage rates and the steps to buy a house or property. One of the most common sources of confusion surrounds the difference between mortgage pre-qualification, pre-approval, and rate holds. Here’s everything you need to know about each.
What is a mortgage pre-qualification?
Getting a mortgage pre-qualification is the first step in the home-buying process. This comes before a mortgage pre-approval and is not to be confused with it. Mortgage pre-qualification is a relatively simple process where you supply your Mortgage Broker with information about your financial situation including income, assets, and debt. This is an easy and quick process that can be done over the phone or internet and at absolutely no cost to you.
Pre-qualification doesn’t take into account your credit rating or give you an in-depth analysis of your affordability. However, pre-qualification does give you the opportunity to talk to your Mortgage Broker about any specific needs or goals that you may have. You can also get a better understanding of what mortgage rates and options might be suited to you. Pre-qualification can give you an estimate of the mortgage amount for which you can expect to get approved.
What is a mortgage pre-approval?
A mortgage pre-approval is a more thorough investigation of your financial situation. It will provide you, the home buyer, with information regarding the value of the home that you can afford based on your income and savings, as well as the mortgage payments pertaining to a range of purchase prices. Specific documentation (including a mortgage application) needs to be gathered and presented to your Mortgage Broker, which will then assess your situation (including current credit rating) and confirm that you meet all the requirements.
It’s important to note that if you pull your credit report more than three times within six months, this may actually lower your credit rating. So it’s advisable to pick a Mortgage Broker that you see as a good fit to start the pre-approval process.
A mortgage pre-approval provides a mortgage rate guarantee for a specified length of time, which protects you from possible rate increases – this is similar to a rate hold, which is explained below. There typically isn’t an application fee associated with this procedure and you’re not obligated to the bank or mortgage broker from whom you obtained your mortgage pre-approval.
After the pre-approval process, you’ll receive a pre-approval letter for a specified loan amount. This allows you to look for a home at or below that price level. This is an advantage when trying to purchase property as the person selling will know that you have been pre-approved. This can be very helpful in a competitive market. For these reasons, it is to your benefit to receive a mortgage pre-approval.
What is a mortgage rate hold?
A rate hold is the locking in of a specific mortgage rate for a certain number of days. Usually, a rate hold is for 120 days, but 90 and 60-day rate holds are also common. If mortgage rates rise within your rate hold period, rest assured that you have access to your locked-in mortgage rate. If mortgage rates actually decline, you will still have access to the lower mortgage rates currently on the market.
Although a rate hold guarantees you an interest rate for a specified period, it doesn’t confirm that a lender has approved your mortgage application. A lender could refuse to lend to you on the basis that specific criteria were not met. That’s why a mortgage pre-approval is recommended. Conversely, when you receive a mortgage pre-approval, you can be automatically signed up for a rate hold.
How long does a mortgage pre-approval take?
A mortgage pre-approval typically takes a few days, although it can take longer in some special circumstances, such as if you are self-employed or have bruised credit.
Your Mortgage Broker will want to see documentation from you to prove your identity, income and your assets. Part of the time it takes to get pre-approved is simply gathering these documents. It might take some time to get a letter of employment or track down all the necessary paperwork. Your mortgage broker and the lender will also need some time to review your application, check your credit file, find the best mortgage rate you qualify for, and write you a commitment letter.
When you’ve wrote an offer on a property and it has been accepted, you will have to go through the full mortgage underwriting and approval process. This can take anywhere from a few days to a few weeks. Fortunately, you will already have submitted most of the required documentation through the pre-approval process, cutting down on the amount of work you’ll have to do at this stage.
How long is a mortgage pre-approval good for?
Your mortgage pre-approval depends on the lender. Typically you’ll be approved for a period of 120 days (4 months), giving you ample time to look for a home. Often, the lender will allow an extension on your pre-approval. But, you will need to re-submit documents and your guaranteed rate may change.
The caveat to this is if your financial situation changes. A mortgage pre-approval is based on your financial picture at the time it’s given. If you make any major changes after getting your pre-approval, like changing jobs, buying a car, taking on a new loan, or getting divorced, your mortgage pre-approval could be revoked. This is true even after you have final approval for your mortgage. So try and hold off on making any big changes or purchases until after your mortgage funds.
Mortgage pre-qualification vs. pre-approval
A mortgage pre-qualification shouldn’t be mistaken for pre-approval. When you are pre-qualified for a mortgage, your broker or lender will only look at your financial picture as you report it to them. They’ll ask basic questions about your job, income, assets, down payment, debt, and expenses to make an informed estimate of how much mortgage you can afford. This is a good step to take early on – even before you are ready to start looking for a home – because it can give you more certainty about what you can afford and in more detail than you can get from a mortgage affordability calculator. The pre-qualification step can also raise red flags early on, so you have time to make adjustments while you still have time.
A pre-approval takes this one step further by actually collecting detailed information about your situation. They’ll check your credit and get a pre-approval letter that you’ll be approved for a mortgage at a specific rate for a specific amount. It’s a more formal step toward getting a mortgage. It can also give you some bargaining power when purchasing a home.
The bottom line
Understanding common terminology is essential to getting a great deal on your mortgage. A pre-qualification is a quick investigatory tool for homebuyers, a pre-approval is a more formal process that results in you receiving an in-principal commitment from a lender, while a rate hold locks in a rate for a given number of days while you look for a home to make an offer on. If you want to get started with your pre-approval, click the Apply Now button anywhere on my website!
Tatum Neufeld, BComm
Mortgage Broker • Mortgage Tailors