As a prospective home buyer, you may have heard the terms "pre-qualified" and "pre-approved" used in relation to a mortgage and wondered: What’s the difference? Are they just two terms for the same thing?

These terms may sound similar, but they most definitely are not the same thing. And if you think you’re pre-approved, but you’re only pre-qualified, it can lead to confusion and disappointment during your home search. So let’s get these two terms straight.

Mortgage pre-qualification: A preliminary conversation

Let’s say you’re thinking about buying a home and wondering how much of a mortgage you could get. You call your mortgage specialist to let them know you want to start your home search soon and need to know what sort of budget you should consider.

Your mortgage specialist will ask about your income, monthly expenses and debts, and the amount you have available for a down payment. They’ll also inquire about the approximate value of your current home and determine whether you qualify for a first-time homebuyer program. 

With that basic information, your mortgage specialist can tell you whether they believe you will qualify for a mortgage, discuss interest rate options, and offer a ballpark for what your home budget would be. In short, pre-qualification is an overview to give you an idea of how you might qualify financially. It does not guarantee you will be approved for a mortgage or the amount you can borrow.

Mortgage pre-approval: A formal process

The process for getting pre-approved is more formal and in-depth. Your mortgage specialist will ask you to complete a mortgage application and provide details about the amount you have for a down payment, proof of recent employment income (such as pay stubs or a CRA notice of assessment), and information about your current debts and expenses. They will run a credit report on you and, based on all the information you have provided, submit your application to one or more lenders. 

Once an approval has been received from a lender, your mortgage specialist can provide you with a pre-approval letter that spells out the proposed interest rate and term of the mortgage, expected down payment, and loan amount available. With this pre-approval in hand, you can begin house-hunting seriously, knowing that a lender has tentatively agreed to give you a mortgage and how much you can spend.

Two things to remember when house-hunting with a pre-approval

First, you won’t receive final approval on a mortgage until you submit an accepted offer of purchase to your lender. They will review your Agreement of Purchase and Sale and may order an appraisal of the property to ensure its purchase price matches the value. Your approval process is not complete until you receive your mortgage commitment confirmation from the lender.

Second, while a lender might approve you for a given amount, another dollar amount is just as important. I call it the "Get into bed and sleep well" price. It’s one thing to know what a lender will lend you to purchase a home, but sometimes quite another how much you are comfortable spending. Some people are happy to go to the last dollar a lender will allow, confident in their income and financial position. Others prefer to stay somewhere below the pre-approved amount to ensure they won’t be squeezed if interest rates go up or their income changes. Only you can determine where your comfort level lies.

The bottom line

If you’re just curious about what you might be able to spend on a home, pre-qualification is a great first step and there is no need for a credit enquiry. But if you’re serious about buying a home in the near future, seek out a pre-approval from your mortgage specialist so you can get your home search underway for real. 🦜