Pre-qualification, pre-approval, approval: the three terms sound alike, and many institutions use them interchangeably. Yet they give you very different levels of certainty. Before you start visiting homes, it's worth knowing exactly what you have in hand.
The three stages, side by side
| Pre-qualification | Pre-approval | Final approval | |
|---|---|---|---|
| Verification | None: based on what you declare | Income, debts, down payment and credit reviewed | Complete file and property appraised |
| Credit check | Generally no | Yes | Yes (may be updated) |
| Rate hold | No | Generally, for a limited period (a few months) | Yes, under the terms of the loan |
| Lender commitment | None | Conditional: nothing is promised for a specific property | Commitment to lend for that property |
| When | At the very start, for a ballpark figure | Before you start visiting homes | After the promise to purchase is accepted, during the financing condition |
You can ask for a pre-approval directly from your financial institution or go through a mortgage broker, who compares offers from several lenders. Either way, do it before you start visiting: you'll avoid falling for a property that's out of budget, and you'll be able to make an offer quickly.
Pre-qualification: useful, but only to get your bearings
A few questions online or over the phone about your income, debts and down payment are all it takes. The result gives you an idea of the price you could aim for, with no verification at all. If any of the information is inaccurate or incomplete, so is the amount. For a ballpark figure, our borrowing capacity calculator does much the same job.
Mortgage pre-approval: what it requires
For a pre-approval, the lender or mortgage broker actually reviews your situation. The documents requested vary, but they generally include:
- identification;
- proof of income: recent pay stubs, an employment letter and, if you're self-employed, your tax returns for the last few years;
- your latest tax assessments;
- account and investment statements showing where the down payment comes from (savings, FHSA, RRSP for the Home Buyers' Plan), plus a gift letter if applicable;
- a list of your debts and monthly payments.
Having these documents ready speeds up the process, which generally takes a few days. You get a maximum amount, calculated according to the stress test and the lender's ratios, and usually a rate held for a few months. Ask for the exact length of that rate hold and its conditions in writing.
Credit check: what effect on your score?
A pre-approval usually involves a hard credit inquiry (sometimes called a "hard check"), which is recorded on your file and can lower your score slightly for a while. By contrast, checking your own report or getting a pre-qualification without an inquiry has no effect on your score.
That's no reason to skip the pre-approval. Instead, avoid applying for credit for no reason, and above all avoid any new application (car, credit card, financed furniture) between the pre-approval and the signing at the notary. Before you meet a lender, take the time to clean up your credit report.
What a pre-approval doesn't guarantee
- That your loan will be approved. The lender still has to approve the property itself, generally after an appraisal. If the value comes in below the price, the amount lent may be revised.
- That your situation will stay the same. A job loss, a new debt or a change in income before the signing can put your financing in question.
- That the maximum is your budget. The pre-approved amount is a ceiling, not a target.
- Your rate beyond the hold period. If you haven't bought by the time it expires, you'll need to renew it at the rate of the day.
That's why a promise to purchase almost always includes a financing condition: it protects you if final approval isn't obtained. To understand who does what between the real estate broker, the mortgage broker and the notary, see the role of each professional.
Frequently asked questions
What's the difference between being pre-qualified and pre-approved for a mortgage?
A pre-qualification is a quick estimate based on what you declare, with no verification. A pre-approval is based on a review of your income, debts and credit, and generally holds a rate for a few months.
How long is a mortgage pre-approval good for?
The rate hold generally lasts a few months; the exact length varies by lender. If you haven't bought by the time it expires, you can have it renewed.
Does a mortgage pre-approval affect your credit score?
It usually involves a hard credit inquiry, which can lower your score slightly for a while. The effect is limited if you avoid applying for credit repeatedly.
