Prequalification vs Preapproval
Understanding the difference can save you time, protect your credit, and strengthen your negotiating position
Prequalification and preapproval sound similar but have significant differences in how they affect your credit, the information required, and the weight they carry with lenders. Understanding these differences helps you shop for loans more effectively.
Prequalification
Quick estimate based on self-reported information
What It Is
A preliminary assessment of your loan eligibility based on basic financial information you provide. It's a rough estimate, not a guarantee.
Credit Impact
No impact on credit score. Uses soft credit pull that doesn't appear to other lenders.
Information Required
- Estimated income
- Approximate debt amounts
- Social Security number (for soft pull)
- Self-reported credit score range
Time to Get
Minutes to hours, often instant online
Verification
No verification of information provided
Binding
Not binding on either party. Lender can change terms or deny you later.
Preapproval
Verified approval pending final underwriting
What It Is
A conditional commitment from a lender to loan you money based on verified financial information. Much stronger than prequalification.
Credit Impact
Impacts credit score with hard inquiry. Can lower score by 5-10 points temporarily.
Information Required
- Pay stubs or tax returns
- Bank statements
- Employment verification
- Asset documentation
- Full credit report review
Time to Get
1-10 days depending on lender and loan type
Verification
Full verification of income, assets, employment, and credit
Binding
Stronger commitment, but can still be withdrawn if circumstances change or final underwriting reveals issues.
When to Use Each One
Use Prequalification When:
- You're just starting to shop: Compare multiple lenders without affecting credit
- You're unsure of your budget: Get ballpark estimates
- You're researching options: Understand what you might qualify for
- Your credit needs protection: Multiple prequalifications won't hurt your score
- You're months away from applying: Too early for preapproval
Use Preapproval When:
- You're ready to make an offer: For homes or cars
- You want negotiating power: Sellers/dealers take you seriously
- You need accurate numbers: For budgeting and planning
- You've narrowed your choice: Ready to commit to a lender
- You're in a competitive market: Preapproval strengthens your position
The Prequalification Process
Provide Basic Information
Income, employment, debts, and estimated credit score
Lender Performs Soft Credit Check
Checks your credit without impacting your score
Receive Estimated Terms
Lender provides estimate of rate, amount, and monthly payment
Compare Multiple Offers
Repeat with other lenders to find best terms
The Preapproval Process
Complete Full Application
Provide detailed financial information
Submit Documentation
Pay stubs, tax returns, bank statements, ID
Lender Verifies Information
Confirms employment, income, assets, and debts
Hard Credit Pull
Lender pulls full credit report (impacts score)
Underwriter Reviews Application
Detailed assessment of your creditworthiness
Receive Preapproval Letter
Conditional commitment with specific terms and amount
Rate Shopping Strategy
Phase 1: Research (No Credit Impact)
Duration: 2-4 weeks
- Get prequalified with 5-10 lenders
- Compare estimated rates and terms
- Eliminate poor options
- Narrow to top 3-5 lenders
Phase 2: Verification (Credit Impact)
Duration: 1-2 weeks
- Apply for preapproval with top 3-5 lenders
- Do all applications within 14-day window
- Provide requested documentation
- Receive verified offers
Phase 3: Selection
Duration: Few days
- Compare final approved terms
- Negotiate if possible
- Choose best overall offer
- Move forward with chosen lender
Understanding Your Preapproval Letter
Loan Amount
Maximum amount lender will loan you. You can borrow less, but not more without reapplying.
Interest Rate
The rate you're approved for, usually locked for 30-90 days. May include range rather than exact rate.
Expiration Date
When the preapproval expires. Typically 30-90 days. You'll need to reapply after this date.
Conditions
Requirements that must be met for final approval. Read these carefully.
Estimated Monthly Payment
What you'd pay monthly at the approved amount and rate.
Loan Terms
Length of loan, type (fixed or variable), and other key details.
Common Preapproval Conditions
No Major Credit Changes
Don't open new credit accounts, take on new debt, or make large purchases before closing.
Continued Employment
Maintain your current job. Lenders verify employment before closing.
Property Appraisal
For mortgages and home equity loans, property must appraise for the purchase price or higher.
Clear Title
For vehicles and property, title must be clear with no liens or issues.
No Material Changes
Your financial situation must remain substantially the same.
Final Underwriting
Preapproval doesn't bypass final underwriting review before closing.
Why Preapprovals Get Denied
Credit Score Dropped
New debt, missed payments, or high balances between preapproval and closing
Job Loss or Change
Changing employers or losing income affects debt-to-income ratio
Inaccurate Initial Information
Overstated income or understated debts discovered during verification
Property Issues
For mortgages, low appraisal or inspection problems
New Debt
Taking out other loans or credit cards before closing
Incomplete Documentation
Failure to provide required paperwork in timely manner
Do's and Don'ts After Preapproval
DO
- Continue making all payments on time
- Keep your job
- Maintain account balances
- Respond quickly to lender requests
- Keep credit utilization low
- Save for down payment and closing costs
DON'T
- Apply for new credit
- Make large purchases
- Change jobs
- Move money around between accounts
- Co-sign for anyone
- Miss any payments
- Close credit accounts
Improve Your Loan Terms Before Applying
Higher credit scores lead to better prequalification and preapproval offers. Even a 50-point increase can significantly improve your interest rate and loan amount.
Start Credit Repair Today