What is Pre-Approval?
Almost everyone is seeking approval in life - whether it's from your boss, your parents, your friends, or your significant other. But what does approval mean when it comes to getting a loan? Well, it means a lender has decided that you qualify for a particular loan amount under precise guidelines.
In other words, you will be able to get the loan you are applying for. More specifically, pre-approval is generally a written statement from a lender stating his or her preliminary determination that you meet the criteria for the desired loan. Typically, you receive a pre-approval statement once you have applied and the lender has looked over your finances and any other related credentials.
An Example of Pre-Approval vs Pre-Qualified
It is important to note that being pre-approved does not guarantee you will actually get the loan. Instead, many people in the financial realm agree that a more accurate term is pre-qualification. Meaning, it appears as if you qualify for a loan, but the lender makes no official guarantee that you will actually be able to borrow the money. Pre-approved is a popular advertising catchphrase to entice people to apply for a particular loan, but the term can be a bit misleading. Yes, you may fulfill the requirements to get the loan, but that does not mean you will actually drive off with deeper pockets. If you truly are pre-approved, meaning the lender will guarantee you get the credit product no matter what, the statement is most likely chock full of fine print that is not immediately disclosed.
Since most people say pre-approval, but truly mean pre-qualified, let's put semantics aside and discuss what pre-approval means in terms of buying a home. If you are interested in purchasing a house, you can meet with a lender beforehand and have him or her look over your credit history and verify your income. The lender will be able to tell you the amount of money you are qualified to borrow prior to house hunting, so it will be easier to find a property within your loan amount range. If you ask the lender for a letter of pre-approval, it might be easier to buy a house, because sellers will know you are serious about the home buying process and can come up with the necessary financing.
Pre-Approval vs Pre-Qualified
As long as you keep in mind the difference between pre-approval and pre-qualification, you are one step ahead of the game. Pre-qualification is a lender's estimate of how much you could potentially borrow based on financial information you supply. Pre-qualification does not mean you will get the loan, so this is the idea behind most personal loan advertisements you see on TV or hear on the radio. Conversely, pre-approval means the lender is ready to offer you a loan based on your qualifications. The pre-approval statement will be valid for a certain period of time and may contain additional conditions in order to get the loan.
In any case, being pre-approved for a loan is a great feeling, because it means you're one step closer to getting the money you want. However, be sure to keep in mind that pre-approval is not a guarantee that you will actually get the loan, so don't get your hopes up until the terms and conditions are in writing. If you prepare yourself with the important information prior to applying for a loan, you will know what to expect and have greater control over your financial decisions - both now and in the future.