The home buying journey can seem quite simple, but it is important to understand the process and the terminology used along the way. By becoming more familiar with the mortgage home-buying process, you can purchase the home of your dreams, using the correct terminology and getting the best interest rates and mortgage rates possible.
With that in mind, there are two terms you need to clarify before moving forward with your home buying journey: pre-qualification and pre-approval.
Prequalification and pre-approval are letters provided by mortgage lenders and financial institutions to show that your mortgage application is being reviewed and evaluated by the mortgage lender. Unfortunately, many home buyers often interchange the two.
Mortgage Prequalification vs Pre-Approval: What’s the Difference?
What is Prequalification?
Prequalification is the phase of the mortgage process where the home buyer submits to the lender documents that are required for the mortgage lender to conduct a preliminary review of the home buyer’s credit history, income, employment and assets.
During this phase, the home buyer does not provide documents regarding the property that they intend to purchase. The borrower simply tells the lender how much they are wishing to borrow, and how they plan to use the funds.
The lender then evaluates the borrower’s income, debt, and credit information and provides an estimate of how much they would be able to borrow based on their financial situation.
In general, homebuyers should know how much they can afford to borrow before they wish to purchase a property. A mortgage prequalification determines how much the lender thinks they can lend.
The prequalification really is only an opinion of the lender and is not a final decision of the amount the lender will allow.
What is Pre-Approval?
Pre-approval is the phase of the home buying process where the home lender actually evaluates the borrower’s credit, income, and financial information to determine if the borrower qualifies for a specific loan, the loan amount, and the interest rate.
The lender will then provide to the borrower a conditional commitment letter (“pre-approval”) that states the amount that the borrower can borrow and the interest rate for the loan.
As part of the pre-approval process, the borrower must submit to the lender any documents regarding the property that they desire to purchase, and the lender then conducts a more thorough review of the buyer’s financial situation.
The lender will examine the appraisal of the property, and verify that the buyer’s income and assets are sufficient to pay for the purchase, and still meet the debt-to-income ratio requirements.
Why You Need Both Prequalification and Pre-Approval
During the home buying process, pre-qualification and pre-approval are both very important because they can provide the following benefits:
- Helps determine if you can afford to buy a property or not;
- Establishes a price range for homes that you can afford;
- Identifies properties that you can afford;
- Gives you a sense of how much home you can afford;
- Helps you find homes that are within your buying budget;
- Helps you find a lender that meets your needs and requirements;
- Helps you evaluate and negotiate with the seller;
- Provides you with a benchmark for interest rates;
- Establishes a preliminary agreement between the seller and buyer;
- Helps a seller determine if you are a serious buyer.
The Bottom Line: Know the Difference Between the Prequalification and Pre-Approval in the Mortgage Process
Both pre-qualification and pre-approval are important stages of the mortgage process. Pre-qualification can be described as a pre-opinion, where the lender helps you understand how much money you can borrow. Pre-approval is confirmation, where the lender verifies your ability to borrow the amount of money that you desire.
By understanding the difference between these two terms, and what to expect from each phase, you can be well on your way to purchasing the home of your dreams.
How Can We Help You?
Finding and buying a home can be tricky, especially when you put your finances into the picture. Fortunately, with the help of Ottawa Mortgage Services, buying your home for the first time won’t be such a pain.
Our expert mortgage agent in Ottawa Mortgage Services helps first-time homebuyers discover the different possibilities in home buying, get pre-approval letters, obtain assistance for refinancing, offer debt consolidation, and more. Looking for a mortgage? Apply for one today!