Pre-qualified for a loan: what does it mean?
When you’re looking to buy a home or taking out an installment or payday loan, the first step is often getting prequalified for a loan. Prequalification is an estimate of how much you may be able to borrow based on your income, employment, credit and bank account information. It’s generally the first step in the loan application process and helps you identify the right type of financing for your needs.
Prequalification is neither a loan approval nor a commitment to lend. You’ll need to complete a full loan application and provide additional documentation for further review. But getting prequalified gives you an estimate of how much you may be able to borrow and can help you narrow down your home search to properties that fit within your budget.
Lenders usually give two types of prequalifications: verbal and written. A verbal prequalification is more like an estimate based on the information you provided over the phone or in person. A written prequalification comes with an official loan approval letter that includes conditions such as the type of loan, maximum loan amount, interest rate range, estimated monthly payment and other key terms. Most real estate agents will require a written prequalification letter before they start showing homes to buyers.
Getting prequalified is a simple process that can give you valuable insights into your home-buying options. Knowing how much you may be able to borrow gives you more power when it comes time to negotiate the purchase price of your new home.
How to get prequalified for a loan
Prequalifying for a loan gives you a quick glimpse of your borrowing power—the maximum amount you may be able to borrow. It’s fast, usually taking just one to three days to get a prequalification letter. As you get closer to buying a home, it’s a smart idea to get prequalified for a mortgage. This way, you’ll know your price range and can avoid properties that are out of your budget.
Getting prequalified is simple. Just tell your lender some basic financial information, such as your income and debts, and they’ll calculate how much you may be able to borrow. With a prequalification letter from your lender in hand, you’ll have a better sense of how much home you can afford as you start the process of shopping for properties.
The benefits of being prequalified for a loan
Prequalification can bring several benefits.
You can use a loan prequalification to help you:
- Narrow your home search to houses that fit your budget;
- Calculate whether you can afford to make a certain offer on a house; and
- Get an estimate of the monthly mortgage payment and total loan amount you’ll need to finance your home purchase.
The difference between prequalified and preapproved for a loan
There is a big difference between being prequalified and preapproved for a loan. Prequalification usually means you have provided some basic information to a lender, who then gives you an estimate of how much you may be able to borrow. This amount is usually not very firm, and may change based on further information the lender obtains. Preapproval means you have provided more detailed information to the lender, who has then done a more thorough evaluation of your financial situation and has given you a firm offer of how much they are willing to lend you.
How prequalifying for a loan can help you get a lower interest rate
If you’re looking to buy a home in the near future, you likely already know that your credit score plays a major role in how much you’ll pay for your mortgage. A high credit score can save you thousands of dollars in interest over the life of your loan, while a low credit score could result in a higher interest rate and cost you thousands more.
But did you know your credit score isn’t the only factor that lenders consider when determining your interest rate? In fact, prequalifying for a loan can also help you get a lower interest rate.
When you prequalify for a loan, lenders look at factors including your employment history, income, debts, and credit score to determine if you’re qualified to receive a loan and how much you can afford to borrow. Based on this information, they’ll give you an estimate of the interest rate you could qualify for.
While prequalifying for a loan won’t guarantee you’ll get the lowest possible interest rate, it can give you a good idea of what to expect – and it may even help you negotiate a lower rate with your lender.
What to do if you’re not prequalified for a loan
If you don’t get a preapproval letter, that doesn’t mean you won’t be able to get a mortgage. Credit requirements vary by lender, but if your score is lower than 620, it will be difficult to get approved for a conventional loan. If you have a lower credit score and can only qualify for an FHA loan, make sure you’re aware of the following before you apply:
- You’ll need at least 3.5% down
- You’ll pay Mortgage Insurance Premiums (MIP) every month for the life of your loan
How to improve your chances of being prequalified for a loan
If you’re looking to take out a loan, you may be wondering what your chances are of being prequalified. In order to increase your chances of being prequalified for a loan, there are a few things you can do.
First, make sure that you have a strong credit score. Lenders will typically look at your credit score when considering whether or not to prequalify you for a loan. If you have a strong credit score, this will show lenders you’re a responsible borrower and increase your chances of being prequalified.
Another thing you can do is to have a good history of making on-time payments. This will demonstrate to lenders you’re likely to make timely payments on a loan, and they’ll be more likely to prequalify you as a result.
Finally, it’s always helpful to shop around and compare rates from different lenders before applying for a loan. This way, you can be sure you’re getting the best deal possible and increase your chances of being prequalified for the loan.
What to watch out for when you’re prequalified for a loan
You may receive a promotional offer in the mail or see an ad online or on TV telling you that you’re pre-qualified for a personal loan or a credit card. The message is always the same: You’re already approved, so just sign here and spend, spend, spend!
It sounds great, but beware. Pre-qualification is not the same as approval. When you’re pre-qualified for a loan or credit card, it means the issuer has looked at your credit report and decided that you might be a good candidate for the product. But it’s not a done deal. You still have to submit an application and go through the approval process.
What’s more, pre-qualification offers are often misleading. The issuer may use information from your credit report to generate the offer, but that doesn’t mean you’ll actually get the terms that are presented to you. The issuer could change its mind after reviewing your application and credit history. Or, if you decide to apply for a different product from the same issuer, you may not get the same favorable terms.
In other words, don’t let a pre-qualification offer lull you into a false sense of security. It’s simply a marketing tool designed to get you to apply for a loan or credit card. The best way to find out what kind of loan or credit card you can qualify for is to apply for one.
The bottom line on prequalifying for a loan
You’ve probably heard that you should prequalify or get preapproved for a mortgage if you’re looking to buy property. These are two key steps in the home-buying process. Although they’re often used interchangeably, there are some important differences between them.
Prequalifying for a loan gives you an idea of how much you may be able to borrow based on information you provide about your finances, as well as a credit check. But prequalification is neither a commitment to lend nor a guarantee of a loan amount.
Preapproval is more substantive because it means your lender has done more to verify your information and is more confident in your ability to get a loan. With preapproval, you’ll receive a letter from the lender indicating how much you can borrow, up to a certain amount. This can be helpful in two ways: first, if you know the maximum loan amount you can afford, it can help narrow your home search; and second, it shows sellers you’re serious about buying their home and that they don’t need to worry about finding another buyer if they accept your offer.
FAQs about prequalifying for a loan
You may have heard that you should get prequalified for a mortgage loan before you start shopping for a home. That’s because prequalification gives you an estimate of how much loan you may qualify for, based on factors such as your income and debts. But what does that really mean? When you are prequalified for a loan, a lender has looked at your credit report and other information and decided that you might be a good candidate for a loan. You don’t have to take out the loan from that lender, but it will give you an idea of how much money you could borrow.