Back to all posts
July 10, 2024

Pre-Qualification vs. Pre-Approval: What Is The Difference?

Learn the difference between the financing terms pre-qualification and pre-approval and how these processes work for your home improvement customers.

Pre-Qualification vs. Pre-Approval: What Is The Difference?

If your home improvement business has offered financing for any amount of time — or if you have sought financing for your business — you’ve likely seen lenders inviting applicants to see if they’re pre-qualified or pre-approved for financing.

Pre-qualification and pre-approval are both pre-screening processes lenders use to indicate the likelihood a borrower will be approved for financing. But when and how different lenders use these terms can be confusing. They don’t necessarily mean the same things in every context, and sometimes lenders use them interchangeably.

This confusion can impact your customers’ experience when they apply for financing. Depending on their understanding of the terms, they may not know what pre-qualification or pre-approval for a home improvement loan achieves. It’s important to have a basic understanding of these terms and clarify your lender’s use of them to provide a transparent experience for your customers.

What Is Loan Pre-Qualification?

Pre-qualification is the simplest credit application method. It typically relies on a soft pull of your credit score to determine creditworthiness. It doesn’t account for other factors, like income. This process is often automated and provides results almost instantaneously. It’s typically initiated by the customer — hence, lenders inviting applicants to see if they pre-qualify.

What Is Loan Pre-Approval?

Pre-approval is a step up from pre-qualification. Instead of a soft credit pull, pre-approvals require a hard credit pull, which will show on a credit report. Lenders may also require additional information, like income and bank statements, for a pre-approval.

As mentioned, pre-qualifications are typically used for credit cards and personal loans. Pre-approvals are more common for mortgage and auto loans — often in addition to pre-qualification — since they’re larger purchases. But they can also be used for other types of financing.

How Do These Differ From A Loan Approval?

Homeowners who are pre-qualified or pre-approved for financing are usually provided an estimate of how much they can borrow. While this is helpful for understanding their potential budget for a project, it does not guarantee that the lender will approve them for a loan.

Some of your customers may be familiar with financing options and terms, but for others, this may be their first loan other than their mortgage. When discussing customer financing options, it’s important to emphasize approvals are the only way financing is guaranteed. Making this distinction can prevent confusion or disappointment.

The approval process takes the longest out of the three, as lenders look at multiple factors to determine creditworthiness, sometimes including a review of an applicant’s entire credit profile. The amount of time the review process takes depends entirely on the lender. Some lenders may take days or weeks, while others provide same-day results.

For example, FTL Finance provides decisions within 15 minutes for applications submitted during business hours, unless we need additional documentation. Since it’s typically such a short turnaround time, we don’t offer pre-qualifications or pre-approvals. We prefer giving applicants definitive, accurate answers upfront when we can.

The Bottom Line

Pre-qualification and pre-approval are technically different pre-screening processes, but how these terms are used will vary by lender. Some lenders may even have their own pre-screening processes. Be sure to clarify your lender’s process so you can give your customers accurate information.

The most important thing to remember is that neither process is an approval, and your customer will have to complete another application to get a definitive answer.

Seem a little complicated? We agree. That’s why we skip the pre-screening process and go straight to the approval process.

Learn more about offering home improvement financing with FTL Finance

Read more articles like this:
Copyright © 2024 - FTL Capital Partners LLC dba FTL FinanceAll Rights Reserved | NMLS ID 2133635