Mortgage pre-approval vs pre-qualification – What’s the difference?
What is the difference between mortgage pre-qualification and mortgage pre-approval? It’s a question our mortgage consultants are asked frequently, so we’re here to give you details on both of these terms. It’s essential to understand the differences between pre-qualification and pre-approval to prevent hiccups or even your offer falling through.
What is pre-qualification?
Mortgage pre-qualification is a process whereby mortgage lenders can conduct a relatively informal evaluation of your finances and let you know if you would qualify for a mortgage with them and, if so, how much you can borrow.
A mortgage pre-qualification is similar to what you might get when using a borrowing power calculator from a mortgage lender’s website whereby you enter your income, ongoing debts and expenses to find out how much you could borrow with one of their mortgages. The mortgage calculator will also let you know how much your repayments will be.
Thus, mortgage pre-qualification doesn’t hold too much weight. It’s like an informal discussion with the mortgage lender with no concrete agreement to rely on. Nevertheless, there are still some benefits of getting a pre-qualification check completed.
The benefits of pre-qualification
The main benefit of a pre-qualification is that it gives you a rough estimate of how much you can borrow through a mortgage. Having this information could set more realistic expectations in the housing market and help you zone in on certain types of properties within your expected budget. It’s an excellent first step for anyone at the very start of their home-buying journey.
What is pre-approval?
Mortgage pre-approval is a more formal version of the mortgage pre-qualification process. It requires the prospective mortgage applicant to provide evidence of their identity, income, assets, debts and expenses. The mortgage lender will then use this information to make a more accurate calculation and tell the applicant how much they could borrow through a mortgage with them.
The mortgage pre-approval provides the homebuyer with more certainty of what they can afford when entering the market. However, mortgage pre-approvals don’t come with a 100% guarantee. There could be significant changes in the mortgage market and the mortgage products available, which could mean the pre-approval isn’t as accurate at the time it comes to purchasing a property.
The benefits of pre-approval when buying a home
Whether you’re a first-time buyer or a seasoned investor, entering the housing market can be daunting and stressful. Having a mortgage pre-approval that provides increased certainty on what you can afford to borrow will make the process easier and less stressful. Getting a mortgage pre-approval is entirely free of charge, so there really isn’t a good reason not to get one when buying a property.
If you didn’t get a mortgage pre-approval, you might have unrealistic expectations of what you can afford to buy. This includes overestimating your budget, having offers fall through, underestimating your budget, and overlooking properties you didn’t know were within budget.
These processes help decide your affordability
As we have mentioned above, both mortgage pre-qualification and pre-approval help to determine how much you could borrow, albeit with different levels of certainty. They do this by understanding your individual (or joint) financial health.
Both processes look at your level of income and the certainty of that income based on employment contract length, etc. These processes then consider your typical expenses, including any other debts you must repay, including student loan debts.
Using this information, the lenders determine how much you can afford by considering part of your disposable income as money for mortgage repayments. Lenders must protect applicants by ensuring they borrow within their means and account for increases in mortgage payments, also known as a stress test.
Your mortgage affordability will also be partially determined by your credit score, which records how well you have managed personal finances and kept up with other debt repayments. Only a mortgage pre-approval will consider your credit score, which is another reason a pre-approval is more accurate than a mortgage pre-qualification.
Mortgage pre-approvals for home loans strengthen your offer
There are other advantages of mortgage pre-approval, which we haven’t discussed yet, including how a pre-approval will strengthen your offer on a property. If a seller has the option between two similar offers, but one party has a pre-approval and the other doesn’t, the seller will likely choose the party with the pre-approval.
They are likely to choose the offer with pre-approval because it tells the seller that the purchase is less likely to fall through. The only thing that could trump pre-approval at this stage would be a 100% cash buyer offer, which is rare.
Mortgage application considerations
Another benefit of mortgage pre-approval is that it can speed up the sales process as the mortgage lender has already completed several checks. This is a benefit to all parties within the process. That being said, it’s essential to know that you never have to take out a mortgage with the lender who gave you a pre-approval. You can still consider options and opt for a different lender if desired.
You may choose to get several mortgage pre-qualifications completed with different lenders, and then opt for a mortgage pre-approval with your preferred lender. However, it may be best to speak with mortgage brokers before choosing where to apply for pre-approval. There could be better offers for your individual circumstances that you don’t have visibility of.
Get tailored advice from our mortgage advisers
We strongly recommend buyers get a mortgage pre-approval before placing an offer on a property. Our team can help you consider all options to find the most suitable and beneficial mortgage products right now. Contact our friendly advisers today to start your mortgage journey.
