Pre-Approved vs. Pre-Qualified: What’s the Difference?

If you’ve applied for a credit product, such as a mortgage, a loan, or even a credit card, you may have come across the terms, pre-approved and pre-qualified. But what exactly do they mean, and are they the same thing? And when do you need to be pre-approved or pre-qualified? This article answers these questions and explores the similarities and differences between the two.

Pre-approved vs. pre-qualified: Key differences

For various reasons, a borrower may wish to get pre-approved or pre-qualified before they proceed with a formal loan or mortgage application. Before taking a deeper dive, here are some key differences between the two:

What is a pre-qualification? 

A pre-qualification is a preliminary assessment conducted by a lender to give a potential borrower an idea as to whether they would be approved for a mortgage or loan. Pre-qualification involves a basic evaluation, such as income and credit. It can be done very quickly and gives the borrower a general idea of whether they would qualify for a general loan amount. 

In most cases, pre-qualification doesn’t involve an actual credit application, nor is the borrower required to produce documentation to verify their income or other details. The lender may or may not do a soft credit inquiry at this stage. 

What is a pre-approval? 

Generally, a pre-approval is a more thorough evaluation of a buyer’s borrowing capacity. While it doesn’t guarantee loan approval, it usually involves a deeper review of the client's income documents, including tax returns, bank statements, and credit history. 

The pre-approval process often results in a hard credit inquiry and can impact your credit score. Because pre-approvals are more detailed, they have greater value. 

If you’re looking to buy a home and you’ve been pre-approved, a seller will know that you are making a serious offer and that your chances of approval, while not guaranteed, are strong. As a borrower, you will also have a better idea of what your mortgage rate will be, as the lender is able to make a more complete assessment of your overall capacity and creditworthiness. 

Examples of pre-qualified credit

Pre-qualification can be used for various types of loans, including mortgages, auto loans, and personal loans. In addition, credit card companies will pre-qualify potential customers prior to reaching out to them with an offer. 

Here are some pre-qualification scenarios you might encounter: 

Mortgage

During the home-buying process, a real estate agent usually asks prospective buyers if they have a pre-qualification letter indicating how much they might be eligible to borrow. Some agents make this a requirement before showing properties, as it indicates the seriousness of a person’s intent to buy. 

A pre-qualification also gives buyers an idea of the maximum price they’ll be able to pay, helping them focus their search. 

Auto loan

A new car is a major financial investment that, for most, requires shopping around. If you’re planning to borrow money to purchase a vehicle, you may want to obtain a pre-qualification before you start shopping.

As with a home, an auto loan pre-qualification is a low-risk way of finding out how much you might qualify for, especially if you aren't ready to buy a car. There will be no impact on your credit score since the lender will not run a hard credit check. 

It is recommended that you get pre-qualified with multiple lenders, so you can compare rates and get the best deal. This will also give you information to compare against dealer financing offers.

Personal loan 

The pre-qualification process for a personal loan is similar to an auto loan and involves pre-screening by the lender prior to your application being submitted. Various factors, such as your income level, outstanding debts, and repayment history with the lender, may influence the pre-qualification process.

Once you've been pre-qualified, the lender will provide you with loan details, such as the term length and interest rate. After reviewing them, you can decide whether to proceed with a full loan application. 

Credit card 

You’ve likely received an envelope in your mailbox that says you have been pre-qualified for a credit card. It’s an invitation to apply for a credit card, but it does not guarantee approval. You need to apply and submit the right documents for approval.

Credit card companies use pre-qualification letters as a marketing tool after screening potential applicants. They usually work with credit bureaus to obtain a list of candidates who meet minimum criteria, such as a good credit score. The process involves a soft credit inquiry, which doesn't affect your overall score.

Examples of pre-approved credit

Pre-approved borrowers undergo a more rigorous process than pre-qualification, including an application that must be reviewed and approved by the lender. 

Here are some examples of common pre-approval scenarios: 

Mortgage

A mortgage pre-approval is a more in-depth assessment that determines how much money you can borrow for a home purchase. For pre-approval, your lender will evaluate your credit history, income documentation, tax statements (if applicable), and so on, to determine how much you can borrow and at what interest rate. 

As with pre-qualification, a pre-approval letter is not a guarantee that you will get a home loan. However, to a real estate agent or seller, it’s perhaps the strongest indication that you will be approved for a mortgage. 

Most real estate agents will require a pre-qualification or pre-approval letter before agreeing to show you potential homes. Typically, mortgage pre-approval letters are valid for 60 to 90 days.

Auto loan

If you’re looking for a new car, we recommend getting pre-approved with multiple lenders before you start shopping. Just as you would research and compare different cars before buying, comparing loan options (and any dealer financing offer) can help you find the best deal. 

Ensure you gather all pertinent financial information for the lender, such as proof of income, residence, personal details, Social Security number, etc. Remember that a pre-approval will trigger a hard credit inquiry, which may negatively affect your credit score—though, as noted earlier, multiple applications over a short time should only trigger one “credit inquiry” ding. 

Check out different lenders' offers within the period and make your decision. A pre-approval letter will give you the green light to start car shopping. 

Personal Loans 

After getting a pre-approval letter for a personal loan, you must provide additional documents and information for final approval. Note that each lender's requirements will differ. 

If you’re struggling to be pre-approved, there are steps you can take to improve your likelihood of getting a loan. If needed, a co-signer with good credit may increase your chances of approval. 

Credit Card 

You may have received calls and emails about credit card pre-approvals. But while credit cards can be very convenient, you should only apply for a pre-approved credit card if you need one and have a strong credit score. If you still owe money on other cards, a new credit card could put you further in debt. 

Can I opt out of credit card and loan offers? 

Credit card companies only send pre-approval letters to people they think will qualify. But you are not obligated to accept a credit card or loan offer, and there are ways to stop receiving credit card offers:

1. Go to optoutprescreen.com and provide your personal information, including name, address, Social Security Number, Date of Birth, etc. This will help you stop receiving credit card offers in the future.

2. Call 1-888-5-OPT-OUT (1-888-567-8688). Here, you can submit a request to opt-out for five years or permanently.

Can I get pre-approved with multiple lenders? 

When shopping for a home or a new vehicle, it can be a good idea to apply for pre-approval with more than one lender, as it will allow you to find the best rates and terms for your loan. The good news is that multiple hard credit inquiries within a short period only count as a single hard inquiry on your credit bureau, limiting the impact on your credit score. 

While this period varies among bureaus, it generally ranges between 14 and 45 days. For example, if you are pre-approved for a car loan with five lenders within a two-week period, to find the best terms, they should only count as a single inquiry. 

TIME Stamp: Do your research before getting pre-qualified or pre-approved 

Review your financial situation and goals before you apply to be pre-qualified or pre-approved for any credit product. If you do receive an offer, always check out the alternatives, as there may be lower interest rates and better terms available from other lenders. 

Frequently asked questions (FAQs)

Do I need a pre-qualification letter to buy a house?

A mortgage pre-qualification letter isn't required to view a house, but most real estate agents prefer you to have one. If you’re ready to make an offer, you will likely be required to have a pre-qualification or pre-approval letter.  

Do I have to borrow the full amount I’m pre-approved for?

No. You have no obligation to buy at the top of your price range, even if your pre-approval letter allows you to purchase a more expensive home or car than is in your budget. The short answer is that you can, of course, buy a home or car for less than your pre-approval amount. Save money where you can.

Is a pre-approval a guarantee?

A pre-qualified or pre-approval letter is not a guaranteed loan offer. It indicates that a lender is tentatively willing to lend to you. Given the more extensive research involved, a pre-approval carries more weight than being pre-qualified, but it’s still not a guarantee.