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.
These words are both used by the credit industry, mainly in regard to loans. Sometimes this term can be used interchangeably by lenders to mean the same thing. In contrast, other lenders will have distinct differences between what it means when a borrower is prequalified vs preapproved.
In finance, the word preapproved means to be approved before you submit an official application. This means that the lender has assessed your information and determined that you can get approved for a loan if you choose to proceed with the application process. Now you know that you would get approved for a loan if you decide to submit an official application. For this process, a preliminary application might be necessary.
The process of getting preapproved can be started by the customer or the creditor. Sometimes a creditor might come across a list of potential customers on a credit report that meets their requirements and send these individuals a preapproval letter.
But in the home buying process, this is usually only initiated by the potential home buyers. For example, if you get preapproved for a mortgage, it’s most likely because you sent in documents, 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.
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In finance, the word prequalified means to be qualified for approval before you submit an official application. This means that the lender has assessed your information and determined that you meet their requirements for loan approval. Now you know that you meet their basic application requirements and have a higher likelihood of getting approved. In some cases, a preliminary application might be necessary.
The process of getting prequalified usually starts with the customer. The customer will submit a preliminary application with some of their information for the creditor to review. Then, if they meet the qualifications, they will receive a prequalification letter. Now they can submit the complete application and finish setting up their new loan or credit card.
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Sometimes creditors will use these terms interchangeably to mean the same thing. So if they say you are preapproved, they might just mean that you meet specific qualifications they have. If they say you prequalify, they might actually mean you have been approved already for a loan, interest rate, or credit card. This is why it is important to read the fine print whenever you are given an offer that says you prequalify for something you might use. Read the fine print first to determine whether they are using these terms interchangeably or not. There might also be expiration dates on the prequalify offer letters to be aware of.
If the creditor is not using these terms interchangeably, then they do have a subtle difference:
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.
Meanwhile, prequalified is less serious. It usually comes with a less detailed assessment of your information and only determines that you meet specific requirements on the application.
Basically, preapproved means your application has been preemptively accepted, while to prequalify means your application has a higher likelihood of being accepted.
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 in buying a home. By getting preapproved with a mortgage lender you can have the financing all ready as you hunt for a house.
One of the key benefits of getting preapproved is that it doesn’t usually require a full credit report. Many preliminary credit checks don’t impact a person’s credit score, but they can still let the inquirer know the basics of your credit wellbeing.
The part of the application that can impact your credit score is the full, official application. Unless you use a lender that only uses a subprime credit report that doesn’t impact your credit score either.
You might have to provide a few documents to get a preliminary offer letter, especially for larger loans like home mortgages. Some examples of documents you'll need are documents 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 possibly 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.
Many of these required documents are things you’ll need during the full application. But for getting preapproved, 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.
Preliminary offers can be really nice to receive, especially when you are already interested in taking out a loan or getting a new credit card. But this doesn’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.
