What Is a Pre-Approval?
A pre-approval is a preliminary evaluation of a potential borrower by a lender to determine whether they can be given a pre-qualification offer. Pre-approvals are generated through relationships with credit bureaus which facilitate pre-approval analysis through soft inquiries. Pre-approval marketing can provide a potential borrower with an estimated interest rate offer and a maximum principal amount.
How Does Pre-Approval Qualification Work?
Lenders partner with credit reporting agencies to obtain marketing lists for pre-approval offers. Pre-approvals are generated through soft inquiry analysis which allows a lender to analyze some of a borrower’s credit profile information to determine if they meet specified lender characteristics. Generally, a borrower’s credit score will be the leading factor for pre-approval qualification.
Understanding Pre-Qualification Vs. Pre-Approval
Types of Pre-Approval Offers
Lenders send high volumes of pre-approval qualifications for credit cards, auto insurance, or private loans, for example, each year through both direct mail and electronic mail.
- A pre-approval letter is a first-look evaluation of a potential borrower by a lender.
- Lenders use pre-approval letters for credit cards and other financial products as a marketing tool.
- Pre-approved mortgages are often different than a final offer on a mortgage.
- A pre-approval letter does not guarantee a specific interest rate.
Most pre-approval offers come with a special code and an expiration date. Using the special code provided by the lender can help to differentiate a borrower’s credit application and give the borrower some higher priority within the lending process.
To obtain a pre-approved loan a borrower must complete a credit application for the specific product. Some lenders may charge an application fee which can increase the costs of the loan. The credit application will require a borrower’s income and social security number.
Once a borrower completes the credit application the lender will verify their debt-to-income and do a hard inquiry analysis of the borrower’s credit profile.
Receiving a pre-approval offer does not guarantee that a borrower will qualify for the offered loan.
Qualifications for pre-approval offers
Generally, a borrower’s debt-to-income ratio should be 36% or less for approval and the borrower must meet the lender’s credit score qualifications. Oftentimes a borrower’s approved offer will vary significantly from their pre-approved offer which is due to the final underwriting analysis.
Pre-approvals are usually more easily capitalized on with credit cards since credit card products have more standardized pricing and few negotiated fees.
Credit card approvals can usually be obtained online through automated underwriting while non-revolving loans may require an in-person application with a loan officer.
Pre-approved mortgages will often have the greatest variation between a pre-approved offer and a final offer since mortgage loans are obtained with secured capital. Secured capital increases the number of variables that must be considered in the underwriting process.
Underwriting for a mortgage loan typically requires a borrower’s credit score and two qualifying ratios, debt-to-income, and a housing expense ratio. In a mortgage loan, the secured capital may also need a current appraisal which will usually affect the total principal offered.