Two words that you might hear frequently at the beginning stages of your loan search are preapproval and prequalification.
Both preapproval and prequalification can give you an estimate of how much you may ultimately be approved to borrow. But what’s the difference between them?
In short, not much — and any differences depend on each lender’s process and definitions.
Learn more about what these terms mean, and how getting prequalified or preapproved can help when you’re in the market for a loan.
- What are preapproval and prequalification?
- What’s the difference between prequalification and preapproval?
- Why are they important?
What are preapproval and prequalification?
A prequalification or preapproval letter is a document from a lender stating that you will probably qualify for financing.
To get preapproval or prequalification for a loan, you’ll need to provide certain financial information. A lender will typically look at things like your income, assets, debt and credit reports to decide how much it might be willing to lend you. Some lenders will preapprove you just from the information you give them. Others will want to dive deeper.
Being prequalified or preapproved isn’t a guarantee that you’ll be offered a loan — you’ll still need to provide more information before you can be approved and receive an official loan offer.
Does prequalification or preapproval hurt my credit scores?
It depends. If the prequalification or preapproval includes a hard inquiry, it may have a minor, negative impact on your credit scores. Before proceeding with a prequalification or preapproval, check with the lender about which sort of credit pull they perform. If they do a “soft” credit pull, you won’t impact your scores.
What’s the difference between prequalification and preapproval?
According to the Consumer Financial Protection Bureau, there’s not much difference between the two terms, other than some legal distinctions. Where one lender may use the term “prequalification,” another may use “preapproval.” But both terms mean that a lender is likely willing to loan you a certain amount of money, as long as the financial info you’ve provided checks out — and as long as a deeper dive doesn’t raise any red flags.
Let’s compare how two different lenders use preapproval and prequalification.
- Wells Fargo uses both prequalification and preapproval in its mortgage lending process. With this lender, prequalification gives you a rough estimate of what you might qualify for, but it doesn’t require a credit check. Wells Fargo’s process for preapproval, on the other hand, does involve a credit check.
- Bank of America uses the term prequalification in its mortgage lending process, which for this lender does include a credit check.
In both cases — again — prequalification and preapproval represent steps toward getting approved for a loan, but neither guarantees loan approval.
Why are they important?
If getting preapproved or prequalified doesn’t guarantee a loan offer, then why bother?
One big benefit is that a preapproval or prequalification letter can let sellers know you’re a serious potential buyer. This can be key in a competitive market.
Other benefits of getting preapproved or prequalified include …
- Knowing in advance how much you may get to borrow. If you want to buy a car or a home, getting preapproved or prequalified can let you know if your budget is realistic. If you’re applying for a different type of loan, the process can give you an idea of how much could be available to you.
- Seeing any credit issues that need to be addressed. A lender may check your credit as part of prequalification or preapproval, so it’s a good idea to review your own reports beforehand. If you uncover any errors, you can look into disputing them. If your credit history has some legitimate dings, you can take steps to improve your credit.
If you’re denied preapproval or prequalification — or if you’re preapproved or prequalified for a smaller amount than you’d hoped — take the opportunity to ask the lender how you can improve your chances of getting the loan you want in the future.
The definitions of preapproval and prequalification can vary from lender to lender, so it’s important to understand each lender’s process. While neither guarantees a loan offer, getting preapproved or prequalified can give you an idea of how much you may be able to borrow — and may even help you be more competitive in a hot market.