At a Glance
Prequalification is an important step in the loan process. It’s a way for lenders to determine whether you’re a good candidate for a loan without performing a hard credit inquiry. Luckily, this step doesn’t actually have an impact on your credit score, as it’s considered a soft inquiry. However, a hard inquiry will be required if you proceed with a formal loan application, which can temporarily lower your credit score.
In this article, you’ll learn:
Is the average credit score for people making $30,000 or less per year.
What is prequalification?
Prequalification is a process that allows a lender to assess a borrower’s financial situation and determine if they are likely to be approved for a loan or other financial product before the formal application process begins.
During prequalification, the borrower typically provides basic information about their income, expenses, assets, and debts. The lender then uses this information to estimate the amount of credit the borrower is eligible to receive, along with the interest rate, repayment terms, and other conditions that would apply to the loan.
How does prequalification affect your credit score?
The process of prequalification typically involves a lender checking your credit report to assess your creditworthiness. However, this inquiry is usually considered a “soft inquiry” or “soft pull,” which means it doesn’t harm your credit score.
Soft inquiries differ from “hard inquiries” or “hard pulls,” which occur when you apply for credit and the lender checks your credit report as part of the application process. Hard inquiries can temporarily lower your credit score by a few points. Since prequalification only involves a soft inquiry, it won’t affect your credit score. This means you can get prequalified for multiple loans or credit products without worrying about damaging your credit.
When should you consider prequalifying?
You should consider prequalifying for a loan or other financial product when you are in the early stages of planning a major purchase or financial decision. Here are some situations where prequalification might be helpful:
- Buying a home:If you’re planning to buy a house, getting prequalified for a mortgage can help you understand how much you can borrow and what your monthly payments might look like.
- Applying for a personal loan: If you need to borrow money for a major expense, such as a home renovation or a medical bill, prequalifying for a personal loan can help you determine if you’re eligible and what terms you might be offered.
- Opening a credit card: If you’re interested in applying for a new credit card, prequalification can help you see what cards you might be eligible for and your credit limit and interest rate.
- Refinancing existing debt: If you have existing debt, such as a mortgage or student loan, prequalifying for a refinance can help you determine if you can save money by getting a lower interest rate or better terms.
In general, prequalification can be helpful anytime you want to get an idea of what options are available to you before committing to a formal application.
Does prequalifying guarantee your approval?
No, prequalifying for a loan or other financial product does not guarantee that you will be approved. Prequalification is a preliminary assessment of your financial situation based on the information you provide to the lender. However, the lender may require additional documentation and conduct a more thorough evaluation of your financial situation before making a final decision on your application. Even if you prequalify, the lender may still deny your application if they determine that you do not meet their underwriting criteria or if there are issues with your credit report.
Prequalification vs. preapproval
Prequalification is when a lender reviews basic information about your income, debts, and assets to determine how much you can borrow and what interest rate and repayment terms you may be offered. Preapproval, on the other hand, is a stronger indication of your ability to secure a loan than prequalification because it involves a more comprehensive evaluation of your financial situation. Preapproval can give you a better idea of what type of loan you can afford and what interest rate and other terms you can expect.
What to do if you can’t get prequalified?
If you get denied when you try to prequalify, there are several steps you can take:
- Find out why you were denied: Contact the lender to find out why you were denied for prequalification. This can help you understand what factors the lender considered and what areas you may need to work on before applying again.
- Check your credit report: Review your credit report to ensure all the information is accurate and current. If you find any errors or discrepancies, you can dispute them with the credit bureau.
- Improve your credit score: If your credit score was a factor in your denial, focus on improving your credit by paying bills on time, reducing your debt-to-income ratio, and avoiding new credit applications.
- Consider other lenders: Just because one lender denied your prequalification does not mean all lenders will. Consider shopping around and applying with other lenders to compare options and increase your chances of approval.
- Re-evaluate your financial goals: If you were denied, it might be a sign that you need to adjust your financial goals or reconsider your borrowing needs. Take the time to re-evaluate your budget and long-term financial plan to ensure that any new loans or credit products align with your goals and priorities.
Yes, prequalification can be helpful when considering taking out a loan or applying for a credit product. Here are some reasons why prequalification is worth it:
- Get a better idea of your borrowing potential: Prequalification can help you understand how much you can borrow and what interest rates and repayment terms you might be offered. This can help you budget and plan accordingly.
- Save time and effort: By prequalifying before applying for a loan or credit product, you can avoid wasting time and effort on applications that are unlikely to be approved. This can help you focus your efforts on products that fit your financial situation well.
- Compare options: Prequalification allows you to compare loan and credit product options from multiple lenders, giving you a better understanding of what’s available and helping you make an informed decision.
- Protect your credit score: Prequalification typically involves a “soft inquiry” or “soft pull” on your credit report, which does not impact your credit score. This can help you avoid unnecessary credit inquiries that can lower your credit score.
Yes, it is possible to be denied for a loan or other credit product even after prequalification. Prequalification is a preliminary assessment of your financial situation based on the information you provide to the lender.
No, you are not required to borrow the entire amount that you prequalify for. Prequalification is simply an estimate of how much you may be able to borrow and at what interest rate and repayment terms.