Mortgage approval process: Pre-qualification, Pre-approval and Rate Holds

Many first-time home buyers do not know where to begin with the mortgage approval process. A common source of confusion is the difference between mortgage pre-qualification, pre-approval and rate holds.

What is a mortgage pre-qualification?

A mortgage pre-qualification is an informal first pass at mortgage approval. It takes place prior to a mortgage pre-approval and it is important not to use the terms interchangeably. Mortgage pre-qualification is a comparatively simple procedure where you provide your lender with your financial information such as assets, income and debt. This can be done over the phone or internet at no charge to you.

However, pre-qualification does not take into account your credit card rating nor does it give you a detailed analysis of your affordability.  But, by going through the process, you can discuss any specific questions and needs with your lender. It also gives you the opportunity to gain a better understanding of what mortgage rates and options might suit your individual situation. Pre-qualification provides an estimate of the mortgage total that you may be approved for.

What is a mortgage pre-approval?

A mortgage pre-approval comes after a pre-qualification and is a more in-depth analysis of your finances. You will have to gather specific documentation (such as an official mortgage application) to present to the lender.  Your financial situation and your current credit rating will be assessed to ensure that you satisfy all the requirements. There is usually no application fee associated with a pre-approval and you are in no way committed to the bank or mortgage broker from whom you obtained your mortgage pre-approval.

This process will provide you, the home buyer, with detailed information about the home you can afford based on your savings and income, and the corresponding mortgage payments for a range of purchase prices.

Remember, however, that if you pull your credit score more than three times within six months, you may lower your credit rating. So, it is best practice to choose your top three financial institutions from which to obtain a mortgage approval. Make this decision based on the best mortgages rates they provide as well as their terms and conditions. To start the pre-approval process, get in touch with a mortgage broker or a bank.

With some mortgage pre-approvals, you are also provided with a mortgage rate guarantee for a specified length of time. This protects you from possible rate increases in the near future, similar to a rate hold.

Following your application, you will get a written conditional commitment for a defined loan amount. This document allows you to look for a home at or below that price level and is an advantage when you try to purchase a home. The seller will know that you have already been approved for a mortgage, an advantage in a competitive market.

What is a mortgage rate hold?

A rate hold refers to the locking in of a certain mortgage rate for a specified number of days. The time frame is usually a 60, 90 or 120 day period. In the event that mortgage rates rise during your rate hold, you will still have access to the locked in mortgage rate. In the scenario that current mortgage rates actually decline, your lender will typically match it.

Procuring a rate hold differs when you are dealing with a bank as opposed to a mortgage broker. When you go to a bank, you lock in one of the bank mortgage rates for the specified length of time. On the other hand, with a mortgage broker, you can potentially lock in a few different mortgage rates with various lenders. These rates will have different rate holds. Some mortgage brokers may wait a day or so to monitor how the rates are changing and try to maximise your rate hold time.

Though a rate hold assures you of an interest rate for a specified period, it does not mean that a lender has accepted your mortgage application. A lender could still refuse to provide you with a mortgage stating that all conditions were not met. So, it is best to get a mortgage pre-approval. The same is not true the other way around. If you receive a mortgage pre-approval, you can be automatically signed up for a rate hold.

To recap, a pre-qualification is a fast investigatory tool, but a written pre-approval is necessary to get a mortgage loan and rate commitment from a lender.