Whether you need a loan to purchase a home or car, or you’re in the market for a new credit card, you’ll want to take the time to see if you prequalify.
Prequalification provides consumers a way to find out what their chances are of being approved for a new loan or credit product before filling out an application form. Plus, the prequalification process won’t negatively affect your credit score the way it will once you formally apply.
What is prequalification?
A person can request prequalification before applying for almost any type of loan or credit card either through the lender or online. To receive prequalification, borrowers need to provide a few key pieces of information, such as employment status and current income and debt. This step only takes a few minutes to complete, with the results typically provided immediately after submitting the prequalification form.
When dealing with a mortgage lender, you may receive a prequalification letter in the mail from the lender. However, for most other products, you’ll need to either fill out an online form or speak directly with a representative from the financial institution with which you wish to do business.
Once you receive a prequalification letter, you will need to review the document and decide whether you’d like to proceed with applying for the loan.
7 things you need to know about prequalification
Whether you’re interested in applying for a loan or a credit card, it’s helpful to review the following points about prequalification:
1. How to get prequalified
You may prequalify for certain credit cards or loans without taking any action. This can happen when financial institutions request lists from credit bureaus on specific groups of people, such as consumers with above-average credit scores, to market their products to. The bank or credit union then sends a letter or other promotion to the individuals on the list to let them know they prequalify.
When financial institutions use credit reports for marketing purposes, the activity is recorded on your credit reports, but it has no negative impact on your scores.
Borrowers who need a credit card or loan don’t have to wait for a prequalification letter to show up in the mail, however. Many lenders offer prequalification tools on their websites.
Online prequalification generally requires you to enter personal information. That information is used to determine which credit cards, auto loans or other products you’re eligible for. Some online application tools generate your prequalification offers in as little as one minute after receiving your information.
Common information you should be prepared to provide can include:
- Social Security number
- Employment status
- Proof of income
- Estimated down payment if purchasing a home
- Late mortgage payments
- Bankruptcies or foreclosures
2. When should you seek prequalification?
There’s no time like the present to seek prequalification. Because the process is free and doesn’t impact your credit, there’s no harm in starting the process. Receiving a prequalification offer does not obligate you in any way to follow through with the process.
In fact, by seeing the types of rates you may qualify for, prequalification could calm your nerves and boost your confidence. Seeking prequalification early, and from several lenders, can help you better prepare for your mortgage application and help you comparison shop for your best rates.
3. How does prequalification affect credit scores?
There are two types of credit inquiries that financial institutions run to determine whether a person qualifies for a loan. A soft credit inquiry, which is used during the prequalification process, does not affect credit scores, so there is no risk in trying to find out whether you’re at least in the ballpark for approval for a specific loan or credit card. Viewing your own credit scores and reports also counts as a soft inquiry.
A hard credit inquiry, which takes place when you actually apply for a loan or credit card, will have a negative impact on credit scores, although the impact will be temporary. Hard inquiries are made during the preapproval or approval process, when the lender examines your credit report to determine whether there is anything that would make you a credit risk.
But what about shopping for a mortgage? Does getting prequalified for a mortgage hurt your credit score?
Just like other loans or credit cards, mortgage prequalification doesn’t hurt your scores since it’s also based on a soft inquiry. Having your credit report evaluated is a necessary part of the mortgage process.
4. Is prequalifying the same as getting approved?
While a person may prequalify for a loan, that doesn’t mean they will be approved. Prequalification is given strictly based on what the person reports.
During the approval process, a potential borrower’s application is examined in greater detail. Employment status, income and debt are verified during the approval process. Credit reports are also checked for things like a history of late payments or bankruptcies. If there are any discrepancies, or the lender comes across information they don’t like, a loan can be denied. This is true even if prequalification was previously granted.
5. Prequalified vs. preapproved
When it comes to loans, prequalification is more of a tool for consumers to see how much they can afford to borrow. As stated above, prequalification doesn’t guarantee that the loan will be approved. On the contrary: mortgage preapprovals simply help potential buyers determine how much home they can afford. A preapproval, on the other hand, tells the listing agent that if this offer is accepted, it will indeed be able to close.
6. You don’t have to borrow the entire amount you prequalify for
Borrowers aren’t obligated to borrow the full amount they prequalify for. Instead, prequalification allows borrowers to get an idea of the maximum amount they may be able to borrow.
It’s important to look at your overall budget and determine how much debt you are comfortable taking on. Additionally, you don’t have to stick with the first lender that prequalifies you. In fact, it is beneficial to shop around and compare loan and credit card offers before selecting the one you want to apply for. That way, you get your best rate and terms available and avoid paying more than you must in the long run.
7. What to do if your prequalification application is denied
There are some steps you can take to improve your situation if your prequalification application is denied. Equifax recommends obtaining a copy of your credit report and reviewing it for errors and areas where you can improve. Perhaps you need to start making extra payments to reduce your debt, or find a cosigner for a small loan or retail card to develop your credit history. You’ll also want to ask the lender the reason for the denial. If the lender requires two years of employment history, for example, and you only have a year and a half, you’ll know to look for another lender or wait six more months before applying again. You’re entitled to free copies of your credit report each year at AnnualCreditReport.com.
Getting prequalified can reduce unpleasant surprises
When used properly, prequalification is a helpful tool that can reduce your chances of being surprised by a credit card rejection or help you determine the odds of being approved for a loan.
Not only does a prequalification letter give you the information you need to decide whether you’d like to proceed with a formal application for a loan or credit card, but it can also be submitted with a real estate offer to show buyers you’re more likely to get the necessary funding to close on the property.
Obtaining prequalification is usually quick and painless, and most importantly, it won’t affect your credit score.