Home Loan Pre-approval and Pre-qualification


What is the difference between loan pre-approval and loan pre-qualification, and exactly how does the difference affect the home buyer’s ability to purchase her desired home?
Why are these concepts important and timely when considering buying real estate? Do you really even need to be pre-approved or pre-qualified by your lending institution in order to secure a home loan?

Although it is easy to get these terms confused, there is actually a huge difference that may seriously impact your ability to buy a home in the desired time-frame. Preparation often makes the difference.

Possessing a pre-qualification letter denotes a situation where the prospective buyer presents to the seller “a statement of ability to buy” based upon the income and assets that the buyer has presented to the lender. The lender simply pre-qualifies the buyer on his word, without any documents of proof that would otherwise be required for loan requisition. This action is usually a conversation-starter and gets the buyer pointed in a general purchasing direction. Realistically, it carries little weight in a serious offer to buy.

Loan pre-approval, however, denotes a situation where the lender has completed an exhaustive analysis of the prospective buyer to determine his actual ability to purchase a home at a certain price level. This “proof of ability to buy” is then presented to the seller along with her purchase offer. This pre-approval document actually empowers the prospective buyer with greater negotiating power and communicates to the seller that the buyer’s offer is a serious one and the lender has promised the money to the buyer.

A seller will usually weigh the validity of all offers put on the table from a variety of perspectives. The buyer’s actual ability to buy is perhaps the most important variable.

A mortgage pre-approval can help simplify your home-buying journey. By knowing how much you can afford, you can approach house hunting with confidence and save time by focusing on those properties within your budget.  Furthermore, it presents the buyer as the most attractive offerer, possessing the ability to move towards closing, especially when multiple offers are brought to a seller.

Loan pre-approval simply puts the prospective home buyer in the best possible position to submit an attractive, timely offer that will be most pleasing to the seller when the right home becomes available. Being fully prepared positions the buyer for success.

Although preapproval requirements may be different from one financial institution to the other but the commonly required documents are to get preapproved are:

  • Two Most Recent T4s if applicable
  • Two Most Recent Personal Federal Tax Returns, include all schedules if applicable
  • Two Most Recent Business Federal Tax Returns, include all schedules if applicable
  • The most recent two pay stubs if applicable.
  • The most Recent Two Months of Bank Statements with ALL the Pages including Chequing, Savings, Investment, and Retirement Accounts.
  • Unexpired Gov’t Issued ID/Permanent Resident Card/Copy of Passport with Valid Work Visa
  • Copy of Rental Agreement or copy of current Mortgage Statement

When you have gathered all the required documentation, it is time to look and apply for the best mortgage rates in your area.

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