If you’ve ever applied for a loan or a credit card, it’s likely you’ve heard these two words at some point during the process: pre-qualified and pre-approved. While the terms sound similar, they are actually quite different, especially when it comes to what is required from the borrower throughout the approval process. While both terms mean that a creditor or lender has completed an initial assessment to determine your likelihood of being approved for a loan, one assessment is more rigorous than the other.
Knowing how best to prepare yourself for both scenarios will only increase your chances of a creditor saying “yes” and securing the best interest rates to boot. To set you up for success, here’s everything you need to know about pre-approval vs. pre-qualification and how it applies to buying a home.
What is Pre-qualification?
When a creditor or lender pre-qualifies a potential borrower, it means they have completed a basic review of a borrower’s creditworthiness, which may include annual income, rent, and savings information. The process is less rigorous than pre-approval and is usually completed when the consumer submits a pre-qualification application. Because it’s less rigorous, when it comes to checking credit history, the inquiry is typically called a soft inquiry, which means that it will not impact the borrower’s credit score.
When it comes to buying a house, getting pre-qualified is typically a quick and painless process, usually conducted via phone or online. The information gathered for pre-qualification doesn’t just help the lender determine the likelihood of loan approval, but it also helps them narrow down the best mortgage programs and types of home loans to offer the borrower. The best thing about the pre-qualification process is its ease; the worst thing is that the process doesn’t always tell the whole story, which means it doesn’t always guarantee an approval.
What is Pre-approval?
While pre-approval typically involves a more rigorous, time-consuming process, it helps creditors and lenders determine with more accuracy the likelihood of a borrower being approved for a loan. Unlike the soft inquiry conducted in the pre-qualification process, pre-approvals are hard inquiries, which may impact the borrower’s credit score in a very small way.
According to the Consumer Financial Protection Bureau, borrowers can shop around for a mortgage and it will not hurt their credit. Within a 45-day window, several credit checks from mortgage lenders are treated as a single inquiry on their credit report. In the mortgage pre-approval process, borrowers can expect to share the following with their lender:
- Proof of income
- Tax returns
- Bank statements
- Credit check
The good news is that even though a pre-approval process may take longer than prequalification, lenders often offer a loan pre-approval letter, which is valid for several months.
How to Set Yourself Up for Success
Now that you know what the difference is between pre-qualified vs. pre-approved, you can take action to give yourself the upper hand in either scenario. From ensuring there are no errors on your credit report to staying employed throughout the loan application process, there are a number of ways to boost your credit score and make an appealing case to a lender to get approved for a loan. But don’t forget to choose a mortgage lender wisely. Arm yourself with questions to ask your lender and see if they offer any useful tools to improve your chances of being approved, such as ScoreMaster.
ScoreMaster is a program that helps consumers achieve their best credit score and take control of their finances. It also helps borrowers get approved for better-quality loans based on their goal credit score. Lastly, it protects against credit score drops during the entire loan process so interest rates stay low while chances of approval soar high.
Learn more about how ScoreMaster can help prospective borrowers get preapproved for a loan.
*Legal Disclaimer — ScoreMaster is a patent-pending educational feature simulating credit utilization’s effect on credit scores via payments or spending. Your results may vary and are not guaranteed.
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