Some creditors use the terms to mean the same thing. But that’s not always the case. For most creditors, they have different meanings depending on the type of loan or credit card you’re seeking.
In both a prequalification and preapproval, the creditor has completed an initial review of your information. This initial evaluation determines if it’s likely you’ll get an approval for a new loan or credit card. A prequalification requires less information and assessment, while a preapproval demands more personal and financial information to make a final decision.
Let’s talk about prequalification first…
When a creditor does a basic review of your creditworthiness, it helps them determine your chances of getting (or not getting) a loan or credit card. This typically occurs when you submit a prequalification application which includes basic information like your annual income, monthly expenses and the amount of money you have in savings.
If the lender determines you’re qualified to go further into the approval process, you’ll be requested to submit more in-depth documents. For example, they’ll probably ask for copies of your W-2, monthly housing receipts and utility bills. They’ll also ask for you to agree to a hard credit inquiry – it’s the type of inquiry that allows them to check into your credit report status and obtain your credit score. This inquiry can impact your credit score. But not to worry, it might lower it by only a few points and for only a very short time.
Now, on to preapproval…
When you get a preapproval for a loan or credit card, it’s a much better sign that you’ll get approved for that credit line. Many preapprovals come in the form of offers by mail, phone or email and it’s up to you whether to respond or not. If you do respond and then apply for credit, you’ll need to agree to a hard inquiry. Getting preapproved does not mean you’ll be approved once items like your income and credit history have been reviewed. Hence the “pre” in preapproval – it basically means you’re approved to have a much more in-depth credit check.
Preapproval and mortgages
Mortgage approvals require a more complex application and review process than the preapprovals associated with simpler loans or credit cards. When it comes to mortgages, you’ll need to submit documents like tax returns, proof of income and bank statements. Plus, of course, you’ll need to agree to a credit check. Once you’re preapproved for a mortgage, the lender may then provide you with a preapproval letter that’s good for a number of months as you look for the perfect home.
Getting prequalified or preapproved with only a soft inquiry (so your credit score doesn’t get hit) is a great way to shop for a loan or credit card without hurting your credit. It gives you a better idea, in advance, whether you’ll be approved or denied. If you know you’ll be denied, you won’t go any further and negatively impact your credit with a hard inquiry. And if you’re approved, you’ll know you’ve been doing a good job handling your finances!
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