Being preapproved or prequalified for a loan are both good things you want to hear. But one can be taken more seriously than the other.
When it comes to loans, mortgages, and credit cards, being preapproved or prequalified are both good things you want to hear. But, in finance, one of these statuses can be taken more seriously and hold more sway than the other.
These words are used by the credit industry, often interchangeably, mainly regarding loans. For some lenders, both phrases mean the same thing. In contrast, other lenders will have distinct differences between what it means when a borrower is prequalified vs preapproved.
If you’re ready to learn more about prequalified vs preapproval, how they work, and when you need each, Check City is here to help. Keep reading to learn everything you need to know about prequalification vs preapproval.
What Does Prequalified Mean?
To be prequalified is when someone meets the qualifications necessary to get an application approved. The process of getting prequalified is usually started by the prospective borrower, who submits their information to see an estimate of how much they can borrow.
Being prequalified takes you one step closer to getting the money you need and seeing what financing options you are more likely to get approved for. However, being prequalified does not hold as much weight as being preapproved since the lender hasn’t looked at your information yet.
What is a Prequalification Letter?
The process of getting prequalified usually starts with the customer. You submit a preliminary prequalification application with some of your financial information for the creditor or lender to review. Then, if you meet the basic qualifications, you’ll receive a prequalification letter. Once you have the letter and are ready to move forward, you can submit the complete application and finish setting up your new loan or credit card.
How to Get Prequalified
The steps are a little different when comparing the process for getting prequalified vs preapproved. To get prequalified, you will need to first complete an application that may include a soft credit check, and then the lender will determine whether or not you meet their qualifications.
1. Complete a prequalification application (if necessary).
Some lenders or creditors may require you to complete a prequalification application to gather relevant information. You will be asked about the type of loan you’re trying to qualify for, your personal and employment details, and a general estimation of your finances.
2. Do a soft credit check.
Your lender or creditor will pull a soft inquiry credit check, meaning they can look at your credit report without impacting your credit score. This information lets them determine if you are prequalified for a loan.
3. Determine if you are prequalified.
Based on your application, provided information, and credit check, a lender can tell you whether you are prequalified. If you are, they’ll give you detailed estimates, like how much you’re prequalified for, the general interest rates, and the potential fees surrounding the loan.
What Does Preapproved Mean?
To be preapproved is when a lender has assessed your information and determined you are likely to get approved for a certain amount. The process of getting preapproved is usually started by the lender, who assesses information from your credit history to see whether you qualify and how much you qualify to borrow.
Being preapproved holds more weight than being prequalified because now the lender has also assessed and verified some of your financial information. A preliminary application might be necessary for this preapproval process.
What is a Preapproval Letter?
A preapproval letter is a letter a creditor might send to a list of potential customers who meet their requirements. Sometimes, a creditor will come across a list of potential customers that meet their loan requirements on a credit report. Then these creditors will sometimes send preapproval letters to these potential customers to let them know they would most likely be approved if they need funding.
However, in the homebuying process, this is usually only initiated by potential homebuyers. For example, if you get preapproved for a mortgage, it’s most likely because you put in some effort. This means you’ve sent in documents and bank statements and shopped for home loans and mortgage lenders to get preapproved for a mortgage so you can submit an offer letter while house hunting.
When comparing prequalified vs preapproved, a preapproval letter shows you’ve completed the formal process of having your financial information evaluated to accurately determine your ability to get a loan.
How to Get Preapproved
Whether you’re wondering how to get preapproved for a mortgage or other type of loan, the process is similar. First, you’ll want to get a credit check, then look over your finances and gather any necessary financial documents, and finally, make an appointment with your lender to see if you can get preapproved.
1. Get a credit check.
You can request a free credit report from the three major lenders: Experian, Equifax, and TransUnion. If your score is below 620 or there are discrepancies in the reports, you should work to resolve these issues and raise your score before trying to get preapproved.
2. Look over your finances.
Before you head to a lender to get preapproved, take time to review your finances. Identify all income streams, list outstanding debts, and print out financial records for your appointment.
3. Gather necessary documentation.
In addition to your financial records, you need other documentation, including Social Security numbers, proof of employment, proof of current address, and two years of W-2s. If you are getting a preapproval letter for a mortgage with another person, they will also need all these documents.
4. Meet with your lender.
Once you have all your financial information and documentation ready, it’s time to meet with your lender. They will review all your records, finalize numbers, and give you a preapproval letter you can use when shopping for a home or vehicle.
Preapproval vs Prequalified
Now that you know the differences between prequalified vs preapproved, you’re better equipped to understand what’s happening when a lender or creditor reaches out with a preapproval or prequalified letter for you.
Though they both can mean you might easily be approved for the line of credit you need, both terms do have subtle differences in meaning:
- Prequalified is less serious. It usually involves a less detailed assessment of your information and only determines that you meet specific application requirements or qualifications you’ll need to meet to get approved.
- Preapproved is more serious. It usually comes with a more detailed assessment of your information to determine that you would be approved if you submitted a complete application.
How long does preapproval last?
It’s important to read the fine print whenever you get an offer that says you prequalify for something so you can determine whether they are using these terms interchangeably or not. A preapproval letter might also have an expiration date to be aware of, which usually falls within 60 to 90 days.
What are the benefits of getting preapproved or prequalified?
You might get an offer letter in the mail for a personal loan, installment loan, or title loan that you may or may not want. But, preapprovals and prequalifications are also extremely useful when buying a home. For example, getting preapproved with a mortgage lender lets you have the financing ready as you hunt for a house so you can:
- Get a home price range
- Become a strong homebuyer candidate
- Close on a home loan faster
- Get a loan amount range
Does prequalified vs preapproved affect your credit score?
One of the key benefits of getting prequalified or preapproved is neither requires a full credit report. Many preliminary credit checks won’t impact your credit score, but they can still let the inquirer know the basics of your credit well-being.
The part of the application that can impact your credit score is the full, official application when you decide to actually apply for the loan. However, this impact is slight and should be resolved quickly. Regarding payday loans, the soft inquiry doesn’t impact your credit score either unless you go with a lender that uses a subprime credit report.
What are the required documents?
You might have to provide a few documents for a preliminary preapproval or prequalification letter, especially for larger loans like home mortgages. Some examples of documents you'll need are ones from your bank account, like statements and other information about any other assets you might have.
When you’re being preliminarily reviewed, you might only need a few or none of these documents. The creditor often just needs an idea or estimate of your finances and ability to set up and repay a loan.
- Bank statements
- Income information
- Government-issued identification
- Social Security card
- Tax documents
- Brokerage account statements
- Credit history
Many of these required documents are things you’ll need during the full application. But for getting preapproved or prequalified, you might only need a few of these documents. For example, some preapproval applications only require income estimates, while the full application will require actual bank statements to show your exact income.
Prequalified vs Preapproved — Which Do You Need?
When getting prequalified vs preapproved, the one you need depends on what you want to do. If you’re casually looking to make a big purchase or get a loan, getting prequalified gives you a basic idea of where you might get approved and how much you might be able to borrow. Meanwhile, getting preapproved gives you more concrete information and a serious assurance you’ll be approved for a loan when you apply.
Preliminary preapproval or prequalification offers can be nice to receive, especially when you are already interested in taking out a loan, getting a mortgage, or getting a new credit card. But these offers don’t mean the process is over. You’ll still need to fill out and submit a complete application with even more information and required documents to finish the process and get your loan.
