You open your inbox to find it’s full of letters promising you’ve prequalified for a new, low-interest credit card. Or maybe these emails say that you are pre-approved for the latest bonus card from Chase, Discover or Citi.
Is there a difference between pre-approval and pre-qualification? And does this mean that lenders will automatically approve your credit card when you apply for one?
The answer, at least to the first question, is complex. Many credit card providers use the terms “pre-qualified” and “pre-approved” interchangeably. But there is a big difference between these two terms when you are applying for a mortgage.
And whether you get pre-approved for a mortgage or a credit card, that doesn’t mean lenders or banks will approve your application after you submit it. These financial institutions will still scrutinize your finances before approving your loan or loan application. .
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What you need to know about prequalification and preapproval
Mike Brown, chief operating officer and chief risk officer of Denver’s Homerun, said it’s no wonder consumers are confused by the terms “pre-qualified” and “pre-approved.” There is no standard in the lending industry for what these terms mean.
Brown noted that some lenders and lenders take a closer look at your financial information, while others spend more time reviewing it during the prequalification and pre-approval stages.
How pre-qualification, pre-approval affect credit
Some credit card companies will perform what is known as a soft check on your credit reports, meaning they will look at your recent payment history and the amount you owe before sending you a letter stating that you are eligible to apply for their card. . (A soft pull won’t affect your credit score.) They’ll call it prequalification. Other financial institutions will do the same and call it pre-approval.
“In fact, the scope of due diligence can vary greatly depending on the lender,” Brown said.
Credit card companies often use the words “pre-approved” and “pre-qualified” to mean the same thing, which can cause confusion for consumers, said Richard Best, author of savings website DontPayFull.
You may receive offers in the mail that say you are pre-qualified for one credit card and pre-approved for another. Best said it often means the same thing, but there are exceptions.
Differences between pre-approved, pre-qualified
It’s best to say that some credit card companies may use the word “pre-approved” to indicate that they have taken a closer look at your credit history than if they had simply pre-qualified you for the card.
But those words have at least one thing in common: “You’re not guaranteed credit card approval anyway,” Best said.
According to Best, you can apply for a card you were pre-approved for only to have your application rejected. This is because you were only pre-approved to apply for the card.
After you apply, credit card providers will take a closer look at your credit. At this stage, they may find that your credit history has too many late payments, your credit score is too low, your monthly debt is too high, or your income is not high enough.
The letter saying you’re pre-approved may even come with a promise of a low interest rate. But that interest rate isn’t guaranteed either, Best said.
You can apply and get approved, but also get a higher rate. Again, this is because credit card providers wait until you formally apply before examining your credit in more detail.
“Credit card issuers look at credit data to identify consumers who broadly match their credit profile,” Best said.
“If you meet the criteria, you may be eligible for pre-approval. Once you apply, the issuer will extract your credit to determine if you qualify.”
See related: Best Low Interest Credit Cards
How pre-qualification, pre-approval work with mortgages
However, there is an important difference between pre-qualification and pre-approval when it comes to mortgages.
Todd Huettner, president of Denver-based mortgage bank Huettner Capital, sums it up this way:
- When a lender says you are pre-qualified for a mortgage loan, there is not much confidence. This is basically a guess.
- When a lender says you’re pre-approved for a mortgagethis lender is much more confident that they will give you the money when you formally apply for a mortgage.
- Here’s how pre-qualification usually goes: You call the lender on the phone or fill out an online form and provide an oral estimate of your debts and income. The lender will then review your credit and let you know if your application is approved.
This problem? As Hüttner said, lenders expect you to be truthful and accurate when you provide information about your income. At this stage, lenders do not ask for documents confirming your income. Because of this, prequalification does not provide any guarantee that you will qualify for a mortgage loan.
Prior approval, however, is different. In pre-approval, you send lenders copies of your most important financial documents, such as tax returns for the last two years, bank statements for the last two months, and two pay stubs for the last two years. Your lender will then use this information to verify your income. Your lender will also check your credit again.
Once the lender has done this, they will send you a pre-approval letter stating how much of the mortgage they are willing to lend to you.
Hüttner said pre-approval is a much more reliable indicator of whether you qualify for a loan. And before you buy a house, you always have to get pre-approved. This way you will know how much home you can afford.
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