When you start thinking about selling or buying a home, there’s lots of real estate terminology that gets thrown around.
You don’t need to know everything (that’s my job!) – but mortgage terminology and processes are essential. The differences between mortgage pre-approval and mortgage pre-qualification can be the difference between an accepted offer and a rejected one.
An offer that includes financing (or any) conditions in Toronto’s competitive real estate market will land you at the bottom of a multiple offer situation (which is the new normal in Toronto). The solution is to satisfy any financing or inspection conditions BEFOREHAND, so you can go in with a strong, clean offer. Most listings include a pre-listing inspection, and getting pre-approved for your mortgage is essential in helping you reach your home ownership goals.
A financial snapshot
Pre-qualification does not guarantee any financing from any lender; it simply helps you understand what you can afford based on your current financial situation.
You can estimate what you’ll pre-qualify for using a mortgage calculator, which usually takes into account your income, assets, and debt.
Mortgage loan originators who offer pre-qualification services will review your income, debt, assets, credit history, available savings, and estimated closing costs to confirm the amount and type of loan you’re eligible for. They may provide you with a pre-qualification letter.
It’s important to note that it’s an approximation of what you can afford and what a financial institution might loan you. It doesn’t always take into account your credit report or other important documentation.
You might see the acronyms TDS or GDS when it comes to mortgage pre-qualification. TDS, Total Debt Services ratio or GDS, Gross Debt Service, is the percentage of your annual income required to pay for monthly housing costs like the mortgage, property taxes, heat and other debts. Higher percentages appear to be riskier to lenders, and it will likely directly impact the amount you get pre-qualified for.
An interest rate agreement
Mortgage pre-approval is when a lender agrees to fund your mortgage based on your financial situation – but it’s not a guarantee.
You’ll submit a loan application which will often include proof of employment, savings, debt information, current salary, position, and length of time with the organization.
The loan originator will tell you the maximum you can afford to spend on a home, your estimated monthly mortgage payment, and what your interest rate will be for your first mortgage term.
The institution will put a rate lock on the interest rate you agree on, which usually lasts between 60 to 120 days. Sometimes, if interest rates drop during the period, the lender will honour the change – but not always. Ask to be sure.
You should receive a pre-approval letter that includes the terms and conditions of honouring the interest rate. The letter helps you shop for homes since you can be confident that, under these terms, the lender foresees no reason they would refuse your loan.
It’s important to note that mortgage pre-approval does not a guarantee that the lender will give you a mortgage loan for that amount. The approved mortgage depends on the value of the home you select and the amount you have saved for a down payment.
So Which Should You Get?
Pre-qualification is a useful tool in the early stages of home searching, and so it’s not a bad idea or a waste of time to get one. However, a pre-approval will provide peace of mind during the home search process, and may help avoid heartache and wasted time. Plus, locking in an interest rate in this low-interest rate environment is a good idea. The Bank of Canada raised interest rates in July for the first time in 7 years, and again in September 2017…many are wondering whether there’s another small increase coming soon.
Have other questions about how pre-qualification and pre-approval affect your offer? Ask me anything!