Two words that you might often hear when looking to apply for a loan or new line of credit are pre-qualified and pre-approved. Both mean that a lender may be willing to loan you a certain amount of money, as long as the financial information you’ve provided is correct. But are there differences between them?
The answer: only a few, but they’re important. Learn more about what these terms mean and how getting pre-qualified or pre-approved can help when you’re looking to apply for a new credit card or make a down payment on a house.
What does pre-qualified mean?
Being pre-qualified means a creditor has completed a review of your creditworthiness to determine how likely you are to qualify for a loan or credit card. Getting pre-qualified involves giving a bank or lender a broad overview of your finances, including your debt, income, and assets. As a consumer, you’ll start this process and submit a pre-qualification application for the type of credit or loan you need.
The lender will then review your application and estimate how much you can expect to receive as the borrower. A pre-qualification can be done over the phone or online and is typically free. It usually takes one to three days to receive a pre-qualification letter. Some lenders will check your credit through a soft inquiry, which doesn’t impact your credit score.
Once you’re pre-qualified, you can choose to apply officially and go through the complete review process. Again, the pre-qualified amount you’re quoted to receive isn’t always a sure thing. It’s based only on the information provided and if the lender can verify it.
What does pre-approved mean?
Getting pre-approved is much more involved than being pre-qualified and carries more weight as a borrower.
To be pre-approved, you must complete an application and give the lender the necessary documentation to perform a thorough financial background check. The lender will then offer pre-approval for a specific amount. The pre-approval process gives you a better idea of the interest rate you’ll be charged.
Some lenders will call you or send out pre-approval offers via mail or email for loans or credit cards. You might receive these offers if you were pre-screened and met their loan criteria.
Pre-approvals for mortgages and car loans differ from those for other types of credit. They can involve an even more complex application, including additional forms and information.
What's the difference between pre-qualified and pre-approved?
Although you might see the words used interchangeably, being pre-qualified and pre-approved are different. Each creditor may also have its definitions based on the type of loan or creditor, making it harder to tell the difference.
For example, you can often get pre-qualified for a loan by telling a potential lender your debt-to-income ratio, and based on this information, the lender will let you know how likely you are to be approved for a loan.
On the other hand, if you’re pre-approved — pending a review of your full credit report and verification of your annual income and outstanding debt—you’re being promised a specific amount of money. But remember, being pre-qualified and pre-approved doesn’t mean you’ll officially be approved for the loan or line of credit.
The main differences between being pre-qualified and pre-approved are:
- The level of commitment from both you and the lender.
- Being pre-qualified is a less-involved process than being pre-approved.
- Being pre-approved can require you to share more personal and financial information with a creditor than being pre-qualified.
- Being pre-approved is a better indicator of acquiring the loan or line of credit.
- For some financial institutions, becoming pre-qualified is typically the initial step before being pre-approved.
But you may be thinking that, if getting pre-qualified or pre-approved doesn’t guarantee a loan offer, then why bother? Well, the process lets you know in advance how much you may be able to borrow and the interest rate you may receive.
Getting pre-qualified or pre-approved can let you know if your budget is realistic if you’re looking to buy a car or a home. If you’re applying for a different type of loan, the process can still give you an idea of how much money could be available for you to borrow.
What can you get pre-qualified or pre-approved for?
You can get pre-qualified or pre-approved in any instance where you need to borrow money from a lender or open a new line of credit. The most popular reason to borrow money is for a home or car loan; for credit, the most common reason is to open a new credit card.
Pre-qualified vs. pre-approved credit cards
A pre-approval for a credit card gives you a better chance of becoming a cardholder. A card company consults a credit bureau to evaluate your creditworthiness before making you a pre-qualified or pre-approved offer.
If you’re interested in applying for that new card, you can respond to the offer to become a cardholder. Using pre-qualified or pre-approved offers is also an opportunity to compare options before officially applying.
Pre-qualified vs. pre-approved mortgage
When it comes to home loans or mortgages, pre-qualifying isn’t as involved, as it simply gives you an idea of whether you could qualify for a loan and, if so, for how much and at what interest rate.
However, getting pre-approved requires more legwork and shows the lender is committed to moving forward with the loan.
Getting pre-qualified for a mortgage is easier than being pre-approved, which also means a pre-qualification is valued less by sellers regarding your ability to get a mortgage loan. When buying a home, being pre-approved has more weight than being pre-qualified.
Pre-qualified vs. pre-approved car loans
When you are pre-qualified for a car, you get an estimated amount of money you might qualify for and an interest rate. At this point, the lender has looked at your finances to make this decision. If you are pre-approved, you are authorized for a set amount of money to purchase your car.
Do I have to spend the amount I'm pre-approved for?
You don’t ever have to spend the amount for which you’re pre-approved. You also don’t have to shop at the top of your price range. It’s important to stay within your budget. While a creditor — after reviewing your finances — approves you for what you can technically afford, try and stay under the total amount to budget for savings and the unexpected.
What is a pre-qualification letter?
A pre-qualification letter is a document from a lender stating you have a good chance of qualifying for financing. Use a pre-qualification letter when house hunting or looking to move forward with purchasing a home. This letter will include the possible amount of the loan you’ve qualified for based on the information provided regarding your assets, income, and expenses.
Can I skip being pre-qualified and just get pre-approved?
There is no requirement to get pre-qualified for any loan or credit card. Instead, jumping ahead to a pre-approval speeds up the process and puts you closer to being fully approved. But if you skip to the pre-approval process, you’ll get a hard inquiry on your credit report. And, if you don’t get approved, not only does your credit report take on the hard inquiry, but also the record of the declined approval.
How long does a pre-qualification vs. a pre-approval take?
A pre-qualification is a less detailed process, and you can usually get one quicker than a pre-approval. A pre-qualification can sometimes happen in minutes over the phone or in seconds online. But, the pre-approval process can still be fairly fast. Some lenders promise pre-approval letters (similar to pre-qualification letters) with quick turnaround times of a day or two. But others could take a couple of weeks to get back to you, especially if your financial situation is more complicated.
Do what you can to get pre-qualified or pre-approved
The definitions of being pre-qualified and pre-approved can vary for each creditor, so do some research to understand each lender’s process. While neither is a guarantee of an official loan offer, getting pre-qualified or pre-approved can give you an idea of how much you may be able to borrow.
Getting pre-qualified is a significant first step, whether you’re looking for a loan or a credit card, and getting pre-approved helps you move closer to full approval. If you’re searching for a new home, discover the steps to choose the right mortgage lender.