What is the Difference Between Prequalified and Preapproved Mortgages in Canada?
The public, and even many REALTORS® view preapproved and prequalified as being the same thing, but they’re not.
Prequalification is based on general information that has been given to a mortgage broker or to your bank (whichever one you’re going to use). This is the first step in buying a home so that you know how much you can afford.
With a pre-qualification, the mortgage broker or bank looks at your total income and your debt and gives you a rough idea on how much you can borrow. In other words, they tell you the amount of money that you could qualify for from a lender.
The broker or the bank will calculate your affordability by doing a Gross Debt Service ratio (GDS) and a Total Debt Service Ratio (TDS). The Total Debt service ratio cannot exceed 32% of your total household income for PITH (principal, interest, tax and heat).
Total Debt service ratio is PITH, plus any other debt you have. This cannot exceed 40% of your household income. The broker for a prequalification takes that information and can, in a very informal way, tell you within 10 minutes on the phone what you have prequalified for.
Once you’re prequalified and you have that in hand, the bank will hold your interest rate, that’s posted for anywhere from 30 to 120 days. These times vary depending on rate stability and are something to discuss with them at the time the prequalification is provided.
A preapproval is much more powerful than a prequalification. With the pre-approval, the lender that is selected actually reviews the application looks at your credit history, employment documentation does the credit check, and does all of the investigative work to make sure that what you've said is accurate.
I saw an instance where somebody was prequalified. When they were on the phone with the broker, they failed to mention they had bought a boat the previous month! Because of that, they thought they were qualified for a higher amount, but they really weren't, since the information they gave to the broker was inaccurate.
With the pre-approval, the bank has gone through the extra step to ensure that the facts are correct. Therefore, the credit check would show the boat and anything else that they have as debt.
The preapproval is much more powerful; the bank will hold the rate for anywhere from 60 to 120 days. At this point, you’re dealing with a specific lender, right in their offices and getting down to the nitty-gritty. Opposed to just having an informal conversation with the broker or bank as is the case with prequalification.
Once you have preapproval in place, the lender will move on to give you the golden ticket which is approval. This is what you really want because it means that you have been fully approved for the home loan, the interest is all outlined within an agreement with them, and you’re ready to go.
With a certificate of approval from your lender in hand, you have a huge advantage over other Buyers and their REALTORS®. You are demonstrating to the Home Sellers that you are a serious Buyer when the time comes to submit your offer. They view this as money in the bank.
Still have questions? Find out more about mortgages here or give us a call. We would be happy to answer any questions you might have.