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Mortgage Pre-Approval Vs. Pre-Qualification in Canada

Mortgage Pre-Approval Vs. Pre-Qualification in Canada

Published by Programme B

If you’re new to home-buying (or skipped the masterclass in real estate your first time around), you’d be forgiven for not knowing a few key terms. The real estate transaction process is flush with jargon and legalese, much of which appears foreign to new buyers.

In this article, let’s get you one step closer to understanding the buying process by looking at the difference between mortgage pre-approval and pre-qualification.

Before you’re “approved” for a mortgage (with the signatures and stamps to prove it), you will probably go through pre-qualification and pre-approval processes, preliminary steps to help the lender determine your general creditworthiness, and help you both determine the amount you can afford.

Here’s what you need to know.

What Is Mortgage Pre-Qualification?

Mortgage pre-qualification involves submitting a few answers and basic financial data to a lender in exchange for a rough estimate of how much you can borrow (if any). It’s a relatively casual process, free of credit checks, verified documents and in-person meetings. Most people nowadays complete their mortgage pre-qualification on the phone or online, waiting a couple of days for the results.

Notably, while pre-qualification is a fantastic first step, it relies entirely on borrower-submitted information and thus holds little water when it comes to making a serious offer.  

What Is Pre-Approval?

Pre-approval is more in-depth than pre-qualification. It often (though not always) requires a credit check, alongside recent statements for loans, verifiable sources of income (like pay stubs), employment history, credit card statements, current asset value and more. (TD has a full list of requirements if you’re interested). Yes, it’s a thorough process – but it has to be, because your pre-approval locks in an interest rate for 120 days.

The process can take a couple of weeks, so ensure you budget your time accordingly. While pre-approvals were traditionally completed through physical meetings, it’s becoming increasingly common to see online pre-approvals (especially since the pandemic).

Do Either Guarantee Approval?

No, neither pre-qualification nor pre-approval is a hard-and-fast guarantor of ultimate mortgage approval. In fact, you hear horror stories of first-time buyers who relied solely on pre-approval to remove conditions to financing in their real estate offers, only to be rejected for mortgage approval – thereby losing a sizeable deposit.=

All that said, pre-approval is still a reasonably good indicator that your mortgage will be approved. It’s probably unwise to hang your hat on pre-approval for subject removals, but you should feel relatively confident with a pre-approval. Pre-qualification, on the other hand, should be viewed as illustrative; you should never view it as a guarantor of final approval.

According to Nobul CEO Regan McGee, pre-qualification doesn’t mean much. In a Medium interview, the innovator shared that “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.”

Which Should You Choose?

Both have their merits, albeit at different stages of the home-buying process. And experts generally recommend that first-time buyers in Canada leap through both hoops.

As you begin your home-buying journey, pre-qualification is important for setting rough parameters on what you can afford and whether your current financial situation is favourable for mortgage approval. Next, as you ramp up your efforts and look for a realtor, pre-approval is a fantastic way to get serious – it locks in an interest rate (giving you some indication of what you’ll pay for each home you consider) and allows you to bid with some degree of confidence.

The wide world of real estate isn’t as scary as its jargon suggests. With a little knowledge and the guidance of real estate professionals, you should be able to skate through your pre-qualification, pre-approval and approval processes with ease.