Prequalification and Pre-Approval—What is the Difference? Home Buying in Ontario
December 15, 2021 | Posted by: Cornell Tulloch
What is the Difference Between Pre-Qualification and Pre-Approval?
Prequalification and Pre-Approval-What is the Difference?
Prequalification is a basic review of the borrower's information to determine their creditworthiness. Pre-approval is an in-depth review of the borrower's financial situation and credit score to determine the mortgage application's status.
While both terms sound almost similar, pre-approval often puts you one step ahead of the home-purchasing competition, unlike prequalification. Prequalification and pre-approval are both processes in the mortgage application process.
Despite being used interchangeably, these terms do not mean the same thing. What are prequalification and pre-approval, and what is the difference between the two? Find out more below.
What is Prequalification?
Mortgage prequalification is often the first stage of the mortgage application during a homebuying process. It involves a lender conducting a basic review of your creditworthiness, overall financial picture, assets, income, and debts.
Typically, the lender checks the borrower's submitted information and estimates how much they can borrow. Prequalification can be done online or via the phone and barely involves any costs. The process is quick and typically takes between 1-3 days to receive a prequalification letter.
Depending on the lender, the initial prequalification process may sometimes permit the discussion of mortgage needs and goals. A lender can also explain the different mortgage options available and recommend the ideal choice. It is important to note that the prequalified amount is not guaranteed until the lender conducts a deeper financial analysis of the borrower and approves their mortgage application.
What is Pre-Approval?
Pre-approval comes after the prequalification process. While prequalification is a good indication of creditworthiness, pre-approval tends to be the definitive word. Ideally, pre-approval is the prequalification process taken up a higher notch.
During pre-approval, the lender often requires deeper proof of your financial stability and history. In addition, the lender verifies your employment, debts, assets and checks your credit report.
Difference Between Prequalification and Pre-approval
The prequalification process doesn't require a mortgage application. On the other hand, you need to fill out a mortgage application for the pre-approval stage after prequalification.
The prequalification stage doesn't require any fees. However, paying fees in the pre-approval stage depends on the lender and the circumstances.
Prequalification does not require a credit history check. On the other hand, lenders make the pre-approval decision based on an intensive credit history check.
The prequalification doesn't require a review of your finances and financial situation. However, the lender reviews every detail of your financial life to make the final decision.
Prequalification does not need an estimate of your expected down payment. However, during pre-approval, the lender will require an estimate of your down payment for the home purchase.
During prequalification, the lender gives an estimate of the home loan amount you qualify for. This decision is made based on the information a borrower submits. However, the lender doesn't always give an estimate of the expected loan amount.
During prequalification, a lender neither gives a specific loan amount nor discloses interest rates information to the borrower. However, during pre-approval, the lender gives a specific loan amount and can disclose the interest rates for the mortgage. This is subject to the approval of the home buying loan.
What Happens After Prequalified and Pre-approved?
Getting prequalified gives a borrower a sense of financial readiness. It introduces you to different mortgage options. However, getting prequalified is not enough to convince home sellers to consider your bid.
On the other hand, getting pre-approved shows that you are a serious buyer, giving you leverage in a highly competitive market. Upon getting pre-approved, you will receive a pre-approval letter, which you can show to real estate agents and sellers when making offers. Pre-approval speeds up the home buying process, letting sellers and real estate agents know that your offer exists in a highly competitive market.
Prequalification and pre-approval are both stages in a mortgage application process. While they may sound similar, both terms mean different things. Some people tend to use these terms interchangeably, so you need to be mindful of the context.
Generally, prequalification is the first step between the two. During prequalification, a lender uses a borrower's information to conduct a basic review to determine creditworthiness. On the other hand, pre-approval takes the review a little deeper and often involves a lender investigating a borrower's financial status and history to give a conclusive decision. Finally, getting prequalified and pre-approved gives a borrower a competitive advantage during the home buying process.