Preapproval

Preapproval is a lender's preliminary assessment of a borrower's ability to obtain a loan. It indicates that, based on initial information, the borrower is likely to be approved for a loan up to a specified amount and price range, subject to verification and final underwriting. A preapproval is not a guarantee; final approval depends on verification of income, assets, credit, and the value of the property or collateral.

Process: Applicants provide detailed financial information—income, employment, debts, assets—and authorize a credit check. The lender reviews this data and may perform a soft or hard inquiry. If the lender issues a preapproval, they supply a letter or notice with an estimated loan amount, rate range, and terms. Final terms are determined during underwriting after documentation and appraisal are reviewed.

Differences: Preapproval differs from prequalification. Prequalification often relies on self-reported data or a soft inquiry and carries little risk to credit; preapproval requires documentation and may involve a hard inquiry. A preapproval can enhance a buyer’s credibility with sellers or dealers but still requires ongoing qualification and is contingent on meeting ongoing criteria.

Uses and limitations: Common in mortgage lending, but also used for auto loans and some credit cards. Preapprovals usually have an expiration date (for example 30 to 90 days). Rates offered are subject to change and depend on market conditions and final underwriting. If circumstances change or new information emerges, the lender can withdraw or modify the preapproval.