The Differences Between A Mortgage Approval vs the Pre-Approval

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You’ve found your dream home: the perfect neighborhood, great schools, a beautiful kitchen, spacious rooms, ideal square footage. When you go to put in an offer, you realize that it’s not only your dream home but someone else’s as well. The seller now has two offers.

Scenario #1: You already have a pre-approval letter in hand. The other prospective buyer doesn’t. Your offer is accepted because the seller doesn’t want to wait for a pre-approval process that should have been done a month ago, and because you provided accurate information about your income, debt, and financial status, your financing is approved quickly and without issue. Congratulations on your new home!
Scenario #2: You are “the other prospective buyer.” You didn’t get pre-approved, thinking you’d have time to do it later. Even if you manage to rush the process and get a pre-approval, you didn’t realize that your debt-to-income ratio is too low to get a loan for this particular house. Your financing is denied. The seller accepts another offer. It’s back to the drawing board.

This happens more often than you’d think. It’s why realtors won’t jump to show you houses until you can present a pre-approval letter. If you want to be taken seriously, you need to get pre-approved.

Here’s a quick guide to the difference between approval and pre-approval, and why it matters to you:

What’s the difference between approval and pre-approval?

One word: verification. Pre-approvals are an estimate, not a promise. A pre-approval is a non-binding statement saying, based on a cursory review of your unverified financial status, that you are eligible for a loan up to a certain amount. It is based on a credit check and (again unverified) claims of income and debt. The approval is the process of obtaining a specific loan on a specific property for a specific amount. These are subject to review of a complete loan application; identification, appraisal, and inspection of the property being purchased; preliminary title report, and supporting documentation.

A pre-approval will almost always contain language to the effect of:

“This letter is conditional on no material changes to your financial condition or credit worthiness. “To get approval, you’ll have to verify your income (via tax returns, pay stubs, etc.), employment history (with T4 or a letter from your employer), assets, credit score, and the value and condition of the property being purchased.

What if you overestimate your income?

Nothing is gained from misstating your income (or debt). A tangled web will need to be unwoven before the approval process is complete, so an overestimation of income (income that you can’t later verify with documentation) will result in a pre-approval that isn’t representative of the size or value of home you can actually afford.

Does a pre-approval guarantee an actual loan?

No, but if you’ve provided accurate information and the lender does a good job scrutinizing your credit history, income, and debt during the pre-approval process, it’s likely that you’ll be qualified for a loan that’s within range of the pre-approval amount.

What happens if the loan commitment is less than the pre-approval?

Sometimes your actual loan is less than what you were anticipating. In these instances, several things can happen:

DENIAL: Your loan can be denied because it’s not enough to purchase the house you were under contract to buy. If you’ve shopped for a home before, you’ve likely seen houses listed for sale, then go under contract after receiving an offer (“pending” status), then come back on the market. This happens for many reasons, such as house inspections reveal a leaky roof, termites, etc. A common cause is the buyer’s inability to get financed for the full price of the home.
DOWNSIZE: If you don’t qualify for the house you wanted, you can re-qualify at a lower loan amount.
HIGHER INTEREST: Lenders can negotiate higher interest rates with buyers who don’t meet the income or credit history requirements. This comes at a cost to buyers, but the benefits (owning your own home, boosting credit with the mortgage versus renting, building equity in a home, etc.) are often worth it.

Pre-approvals are a rather simple, non-invasive process that, if done honestly, can save you time and avoid disappointment. Shopping for a new home should be a fun and exciting experience. Make it so by getting the preliminary work done ahead of time.