You’ve probably heard that you need to prequalify or be preapproved for a mortgage if you’re looking to buy a property. Although some people interchange these words, there are typically two discrete steps involved in applying for a mortgage. When attempting to understand the significant differences between them, can make it challenging.
Although they occur at various stages of the house purchasing process, both processes are intended to help home buyers get a realistic picture of how much they can afford when looking for a property.
Depending on the creditor and the type of loan or credit card, preapproval and prequalification can mean different things; some creditors may even use the phrases synonymously.
In both situations, a creditor has conducted an initial evaluation to see whether you have a good chance of being approved for a new loan or credit card. Depending on the evaluation, it can then present you with various interest rates, terms, and loan amounts.
Prequalification usually refers to less stringent evaluations, however, preapproval could call for you to divulge more details about your financial situation and personal life to a creditor. As a result, a prequalification-based offer can be less accurate or certain than a preapproval-based offer.
What Is Pre-Qualified?
Prequalification denotes that the lender has at least performed a cursory evaluation of your creditworthiness to assess your likelihood of approval for a loan or credit card. When a consumer submits a prequalification application for a loan or credit card, the procedure is started.
Depending on the circumstance, different prequalification requirements may apply. It can entail disclosing fundamental financial details including your yearly salary, monthly housing payment, and savings. Lenders may perform a soft inquiry, which has no effect on your credit scores, to verify your credit in order to prequalify you for various loans.
Once prequalified, you have the option to apply and go through the entire review process. You might be required to produce official documentation for the evaluation rather than estimates, and you might also have to consent to a hard credit investigation that could lower your credit scores.
Prequalification does not ensure approval. However, it’s typically a smart idea to apply for prequalification with a mild inquiry (or no inquiry) if you can. If you are rejected at this point, you can move on and escape the difficult investigation.
What Is Pre-Approved?
It depends on the process, but getting preapproved can be a greater indicator that you’ll be approved for a loan or credit card. Preapproval and prequalified may refer to the same thing, for instance, if you get preapproved for a credit card online.
Additionally, preapproval offers for loans or credit cards may have been sent to you via mail, phone, or email. These prescreened offers typically imply that you were sent a formal credit offer because you were included on a list of customers who satisfy a creditor’s requirements maintained by a credit reporting agency.
The creditor must provide the same terms to you as in the mailing if you accept the offer and submit an application. However, those conditions might have a range, and unless you apply and consent to a hard inquiry, you won’t know your specific offer.
There is still no guarantee that you will be approved, regardless of whether you applied or received an unsolicited offer stating that you are preapproved. This is especially true if your income, collateral, or credit history has recently changed.
In contrast to preapprovals for other types of credit, mortgage and auto loan preapprovals might entail a rather involved application and review process. You might have to consent to a credit check and provide bank statements, tax returns, and evidence of income. After reviewing and confirming these documents, the mortgage or car lender may take some time before providing you with a loan preapproval letter that is valid for a number of months.
Pre-Qualified vs. Pre-Approved: Main Differences
Here is a quick summary of the differences between pre-qualification and pre-approval.
|May verify your credit.||Consists of a credit check.|
|Requires an estimate but no documentation of your assets, income, debt, or credit.||Requires evidence of your finances and proof of your employment.|
|Computes your potential borrowing capacity for a home purchase.||Offers a provisional mortgage offer but does not represent a commitment to complete loan approval.|
|Won’t persuade sellers and real estate agents that you are a serious buyer.||Gives sellers and real estate agents assurance that you can obtain a mortgage.|
|It might just take a few minutes to supply the necessary information.||The application may require 30 minutes or more to complete.|
|Can quickly receive a response.||Possible days to receive a response.|
Does Getting Pre-Qualified and Pre-Approved Hurt My Credit Score?
Prequalification or preapproval offers for credit cards won’t affect your credit scores because, in both cases, a credit check will almost always end in a soft inquiry. However, auto loans and mortgages differ from one another and frequently result in a hard credit check that could lower your credit ratings. Fortunately, if it does, it usually has a little effect and lasts only a few months.
Additionally, keep in mind that credit scoring models will regard all hard inquiries made within a 14-day period as one if you’re comparing rates for an auto or home loan (some models allow up to 45 days). Therefore, if you compare loans quickly, your credit will likely suffer little to no harm.
Pre-Qualified vs. Pre-Approved: Which Is Better?
Getting pre-qualified is a smart idea if you’re just starting to consider purchasing a property. You’ll be able to talk to lenders about the many mortgage kinds to take into consideration as well as what more you can do to get ready. You’ll also receive an idea of how much you could be able to borrow.
However, you can skip pre-qualification and move right to preapproval if you are certain that you are prepared to shop.