It’s important to note that prequalification isn’t the same as a preapproval, which is generally a more formal process. Let’s take a look at what to expect when you prequalify and what it means for your ability to get a loan.
What Does It Mean to Prequalify for a Loan?
When you get prequalified for a loan, you’re actually receiving a basic quote from the lender. Using the personal financial information you provide, the lender can give you a ballpark idea of how much money you might be able to borrow. Additionally, as part of prequalification, you might receive a quote for a potential interest rate and other loan terms. With a prequalification, the lender is clearing you to move forward with a more involved loan application and establishing that you meet the basic requirements that would allow you to get a loan. It’s important to note, however, that the amounts and terms quoted when you prequalify aren’t final. They are a starting point, and the lender will review your documentation before moving forward with the loan and providing you with final terms.
How Does Prequalifying for a Loan Work?
In many cases, prequalification requires a relatively small amount of documentation, and you provide much of the personal financial information, including your income and what you have in your bank accounts. Some lenders might do a cursory check of your credit score to ensure that you meet the minimum requirements before prequalifying you, but for the most part, you provide the information. Depending on the situation and the type of loan, it’s often possible to get prequalified online. You answer a series of questions related to your financial situation, and then you receive information about different loan choices, including different term lengths, interest rates, and loan amounts. Once that’s done, you can choose a quote and go through the more formal process of applying for the loan. Often a prequalification can take as little as a few minutes and gives you an idea of what might be available to you.
Prequalification vs. Preapproval
It’s important to understand that prequalification isn’t a guarantee that you’ll get the loan terms and amount offered to you later. Your final interest rate, loan term, and amount will be presented after you’ve finished the application or preapproval process. Usually, preapproval is a more rigorous process. With prequalification, you provide the information, the lender does a quick credit check to verify you meet the minimum requirements, and you’re offered potential loan terms. Once you agree, then you start the application or preapproval process. With a preapproval, everything is taken a step further. Preapproval is about confirming that you verifiably meet the qualification criteria, and the lender is committed to providing you the loan, assuming nothing changes between the time of the preapproval and loan application. Often, preapproval requires that you provide documentation, such as bank statements, pay stubs, and tax returns to back up your claims about your ability to pay. Your preapproval will also include your interest rate quote, and you may be given a chance to lock in your interest rate.
