When the mortgage industry starts throwing around words like pre-approval and pre-qualification, we can get confused, and maybe even fooled, by what those terms mean.
I like to think of pre-qualifications like our Albertan winters. You know when you look through the window on a sunny, winter day and you think the temperature is going to be warm? But, when you go outside it’s a frigid -30 degrees below PLUS a wind chill! That’s sort of what pre-qualification tools do; they give you an idea of what your mortgage financing could look like.
The pre-qualification number you get when you visit online bank calculators or other mortgage tools is rarely ever what you’ll actually get in reality.
So, why even use these tools?
They are the first step in your mortgage approval process. Let’s say you’re interested in buying a property and want to run some numbers. Pre-qualification tools could be a good starting point for developing a budget. However, if this interest starts to turn serious, there are a few things you need to know so you can shop confidently and with as little stress as possible.
What Is A Pre-Qualification?
You’re probably familiar with a pre-qualification tool. These are the calculators' banks and lenders use on their websites. You input information like income and debts and it spits out a number you could qualify for.
Does this mean you can go house shopping? The short answer is no.
At this point in the process, mortgage lenders have not even seen your mortgage application yet, which is where they will verify your income and your credit. Before you start looking at homes you want to complete the next step with a mortgage broker; the pre-approval.
What Is a Pre-Approval?
A pre-approval means that we have collected the majority of your information needed for the mortgage application such as verifying your income, credit history, debts, and the amount saved for a down payment.
At this stage, we will have a much clearer picture of what you can afford. We can also lock in an interest rate for up to 120 days, but this time frame depends on the lender. This pre-approval amount is what your real estate agent will use when showing you homes.
However, there’s something important I need to stress here. The pre-approval amount here does not mean you will get that full amount. The actual amount that you get depends on the property you’re interested in, including your down payment, property taxes, condo fees, and any other assets you own when it actually comes time to buy a place.
There may also be some conditions the lender will ask you to meet, such as paying off a credit card. In reality, the pre-approval is a second step in the mortgage process.
Managing Your Spending After Pre-Approval
When the lender looks at your application, they are looking at a snapshot of time. If you’re not careful with your spending, you can be denied the loan at the time of purchase because the timeframe has shifted.
If it takes you three months to find a house and during that time you opened a new credit card or bought a car, that will increase your debt ratios and most likely, lower the amount you can be loaned. Any changes to your employment can also impact your approval. An example could include changing from being an employee to a self-employed contractor.
We will also have to include all this new information on your application, further delaying the application process and causing far more stress.
When Am I Actually Guaranteed?
Once you have a firm down payment amount, know the property taxes of the new home, know the value of your current property at the time of sale, and the lender has determined that the property you want to buy meets their lending criteria, that’s when you will be guaranteed the final mortgage amount.
If you have not settled on a property yet, you will not know the actual amount until you finally make the purchase. However, it’s usually within a short range of the pre-approval amount. That’s why we do so much work in this stage so that when you find the right property, we can move on it quickly.
Stick To The Plan
Just like how Doug and myself struggle with being fooled into thinking it’s warmer outside than it actually is, we still stick to the plan and bundle up!
When it comes to mortgage pre-qualifications and pre-approvals it is no different. Just because you have been pre-approved in some way, do not be fooled that you are guaranteed that amount.
You need to make sure that you know all the conditions on your pre-approval and live within your means, especially since your loan can fall through if you do not meet all of its conditions. Always remember, stick to your financial plan!
If you are looking for more information on mortgages and the pre-approval process, Doug and I are always here to help.