Understanding mortgage pre-approval, pre-qualification, and rate holds

Ratehub.ca
by Ratehub.ca October 27, 2019 / 5 Comments

Many first-time homebuyers have similar questions when it comes to mortgage rates and the steps to buy 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 doesn’t take into account your credit 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’s important to note that if you pull your credit report more than three times within six months, this may actually lower your credit rating. So it’s 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 typically isn’t an application fee associated with this procedure and you’re 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.

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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 a rate hold is for 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’re 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’s important to explore all of your options if you’re 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 doesn’t 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’s 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.

How long does a mortgage pre approval take?

A mortgage pre-approval typically takes a few days, although it can take longer in some special circumstances, such as if you are self-employed or have poor credit.

Your mortgage broker will want to see documentation from you to prove your identity, income and possibly your assets. Part of the time it takes to get pre-approved is simply in gathering these documents. It might take some time to get a letter of employment or track down all the necessary bank statements. Your mortgage broker and the lender will also need some time to review your application, check your credit file, find the best mortgage rate you qualify for, and write you a commitment letter.

When you’ve bought a home and are ready to get a mortgage, you will have to go through the full mortgage application and underwriting process. This can take anywhere from a couple of days to a few weeks. Fortunately, you will already have submitted most of the required documentation through the pre-approval process, cutting down on the amount of work you’ll have to do at this stage.

How long is a mortgage pre-approval good for?

Your mortgage pre-approval depends on the lender. Typically you’ll be approved for a period of 90 or 120 days, giving you ample time to look for a home. Often, the lender will allow an extension on your pre-approval. But, you may need to re-submit documents and your guaranteed rate may change.

The caveat to this is if your financial situation changes. A mortgage pre-approval is based on your financial picture at the time it’s given. If you make any major changes after getting your pre-approval, like changing jobs, buying a car, taking on a new loan or getting divorced, your mortgage pre-approval could be revoked. This is true even after you have final approval for your mortgage. So try and hold off on making any big changes or purchases until after your mortgage funds.

Mortgage pre-qualification vs. pre-approval

A mortgage pre-qualification shouldn’t be mistaken for pre-approval.

When you are pre-qualified for a mortgage, your broker or lender will only look at your financial picture as you report it to them. They’ll ask basic questions about your job, income, assets, down payment, debt and expenses to make an informed estimate of how much mortgage you can afford. This is a good step to take early on – even before you are ready to start looking for a home – because it can give you more certainty about what you can afford and in more detail than you can get from a mortgage affordability calculator. The pre-qualification step can also raise red flags early on, so you have time to make adjustments while you still have time. 

A pre-approval takes this one step further by actually collecting detailed information about your situation. They’ll check your credit and get a letter of commitment from a lender that you’ll be approved for a mortgage at a specific rate for a specific amount. It’s a more formal step toward getting a mortgage. It can also give you some bargaining power when purchasing a home. 

Pre-qualification

Pre-approval

Commitment Shows affordability at a snapshot in time Locked in for up to 120 days
Reliability Can provide an early estimate of mortgage affordability Provides a written commitment to mortgage affordability
Mortgage rate hold The mortgage rate estimated based on recent applicants with similar profiles Your mortgage rate committed to you in writing by the lender
Mortgage amount Maximum mortgage amount based on assumed mortgage rate and rough debt service ratio calculation Maximum mortgage amount based on lender’s criteria and committed to in writing by the lender
Documentation Answer questions about your financial situation Submit documents proving your financial situation
Credit check No credit check Broker and/or lender will pull your credit report
Conditions Details will vary based on financial situation Commitment subject to your financial situation staying the same
When to get it As early as possible in the homebuying process When you are planning to purchase a home within the next 3 months

 

The Bottom line

A pre-qualification is a quick investigatory tool for homebuyers.  By contrast, a pre-approval with a rate hold is necessary if you want a loan and mortgage rate commitment from your lender.

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