When You Should Get Pre-Approved for a Loan (and When You Shouldn’t)
Getting pre-approved for a loan can be a valuable step when preparing for a large purchase, such as a home or car, because pre-approval gives you an idea of how much financing you may qualify for based on a preliminary analysis of your income. , debts and the lender’s credit history – but you should consider your circumstances and timing before getting one. Here’s a look at why pre-approval matters, how it affects your credit, and how to determine when you should get one.
Benefits of getting pre-approved for a loan
The key benefit of being pre-approved is that it allows you to shop with confidence as you will have a better idea of your estimated budget and price range. This will also show sellers that you are a serious and creditworthy buyer. Having a pre-approval letter in hand can give you an advantage over other bidders when purchasing a home, for example.
Additionally, the pre-approval process helps identify any potential problems with your credit report early on. This gives you the opportunity to correct mistakes or work on improving your credit profile before officially applying for credit.
Difference Between Pre-Qualification and Pre-Approval
Unlike full pre-approval, lenders can also pre-qualify you for a loan. Although they sound similar, they are significantly different and it is important to understand the nuances involved. Pre-qualification is issued only based on the information you provide to the lender. Think of it as an initial estimate of what you can borrow based on your own accounting of your savings and income.
On the other hand, pre-approval requires the lender to obtain your credit report and check other financial details, such as the amount of money in your bank account and your annual income. This formal process provides a more accurate and reliable assessment of your loan eligibility.
How Loan Pre-Approval Affects Your Credit
One of the concerns with getting pre-approved is the potential impact on your credit score. It’s true that when you formally apply and the lender makes a “hard” cut , your score may take a slight hit. However, if you evaluate a store with multiple lenders over a short period of time (around 14-45 days), those multiple inquiries will be recorded as one hard inquiry, minimizing the impact on your credit score.
It’s a different story with simple pre-qualification: for these, most lenders use a “soft” credit pull that doesn’t affect your credit score at all, so getting pre-qualified with multiple lenders to compare initial credit scores is perfectly acceptable. .
When is it necessary to get pre-approval for a loan?
The ideal time to get pre-approved for a loan is two to three months before you plan to make a large purchase. This gives you enough time to work out any issues with your finances, but ensures that the pre-approval will be valid when you need it, since pre-approvals are usually only good for 60 to 90 days.
Pre-approval is recommended if:
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Are you serious about buying a house or car?
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Do you want to get a preliminary loan estimate to compare options?
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You have found a specific property and want to make a competitive offer
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You have a good credit history and want to demonstrate your purchasing power.
When should you refuse pre-approval for a loan?
There is no point in getting pre-approved for a loan a year or more before you actually need financing, since pre-approval typically expires within 60 to 90 days.
You can also delay pre-approval if:
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Your Credit Score Needs Serious Work
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Are you just starting to think about a future purchase?
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Your income situation is unstable or in transition
How to determine the time of pre-approval of a loan
While pre-approval can be beneficial when making a large purchase, getting it too early can have a negative impact on your credit score if the pre-approval expires and you have to apply for a new one after the aforementioned multi-inquiry window closes.
Ultimately, thoughtful preparation and reasonable timing of your pre-approval application can make it easier to obtain financing and help you qualify for a loan without excessive credit checks. Consider getting pre-qualified first to get a general idea of your purchasing power before getting formally pre-approved.