Many first-time home buyers have similar questions when it comes to mortgage rates and the financial steps behind buying a house or property. One of the most common sources of confusion surrounds the difference between mortgage pre-qualification, pre-approval and rate holds.
What is a mortgage pre-qualification?
Getting a mortgage pre-qualification is the first step in the home buying process. This comes before a mortgage pre-approval and is not to be confused with it. Mortgage pre-qualification is a relatively simple process where you supply your lender with information about your financial situation including income, assets and debt. This is an easy and quick process that can be done over the phone or internet and at absolutely no cost to you. Pre-qualification does not take into account your credit card rating or give you an in-depth analysis of your affordability. However, pre-qualification does give you the opportunity to talk to your lender about any specific needs or goals that you may have. You can also get a better understanding of what mortgage rates and options might be suited to you. Pre-qualification can give you an estimate of the mortgage amount for which you can expect to get approved.
What is a mortgage pre-approval?
A mortgage pre-approval is a more thorough investigation of your financial situation. It will provide you, the homebuyer, with information regarding the value of the home that you can afford based on your income and savings, as well as the mortgage payments pertaining to a range of purchase prices. Specific documentation (including an official mortgage application) needs to be gathered and presented to the lender, who will then assess your situation (including current credit rating) and confirm that you meet all the requirements. It is important to note that if you pull your credit bureau more than three times within six months, this may actually lower your credit rating. So it is advisable to pick your top three financial institutions to obtain a mortgage approval. Get in touch with a mortgage broker or bank to start the pre-approval process.
A mortgage pre-approval sometimes provides a mortgage rate guarantee for a specified length of time which protects you from possible rate increases (similar to a rate hold). There is typically not an application fee associated with this procedure, and you are not obligated to the bank or mortgage broker from whom you obtained your mortgage pre-approval. After this process, you will receive a conditional commitment in writing for a specified loan amount. This allows you to look for a home at or below that price level. This is an advantage when trying to purchase property as the person selling will know that you have been approved for an actual mortgage. This can be very helpful in a competitive market. For these reasons, it is to your benefit to receive a mortgage pre-approval.
What is a mortgage rate hold?
A rate hold is the locking in of a specific mortgage rate for a certain number of days, usually 120 days, but 90 and 60 day rate holds are also common. A rate hold only really applies to fixed rates, since variable rates fluctuate by nature.
There are a few differences to be aware of when acquiring a rate hold with a bank as opposed to with a mortgage broker. With a bank, you can lock in the day’s current mortgage rate for the specified length of time. If you go back to them within that time, you are entitled to the rate that you locked in. However, a mortgage broker will generally try to lock in a few different mortgage rates with various lenders. As a consequence, these fixed rates will have different rate holds. Independent mortgage brokers work differently but some of them may wait 24 hours to monitor how the rates are changing and that way maximize your rate hold period. It is important to explore all of your options if you are considering buying a property in the short term and a rate hold requires thinking ahead of time.
If mortgage rates rise within your rate hold period, rest assured that you have access to your locked in mortgage rate. If mortgage rates actually decline, you will still have access to the lower mortgage rates currently on the market.
Although a rate hold guarantees you an interest rate for a specified period, it does not confirm that a lender has approved your mortgage application. A lender could refuse to lend to you on the basis that specific criteria were not met. That is why a mortgage pre-approval is recommended. Conversely, when you receive a mortgage pre-approval, you can be automatically signed up for a rate hold.
So, to sum up, a pre-qualification is a quick investigatory tool for home buyers, but a pre-approval with a rate hold is necessary if you want a loan and mortgage rate commitment from your lender.
To learn more, watch John Helfrich’s video on Mortgage Pre-qualification, Pre-approval, and Rate Hold: