Pre-Qualification: What It Means, Special Considerations

What Is Pre-Qualification?

The term pre-qualification refers to an estimate for credit given by a lender based on information provided by a borrower. Pre-qualifications are conditional and involve the lender reviewing a borrower's creditworthiness before granting a pre-approval. Lenders generally use this as a marketing tactic for creditors seeking new customers, especially for things like credit cards and mortgages.

How Pre-Qualifications Work

Pre-qualifications are popular marketing tactics many creditors use to entice new and existing customers to apply for credit products such as loans and credit cards. However, mortgage lenders may also use pre-qualifications for a new loan or refinancing an existing mortgage. In most cases, pre-qualifications are unsolicited offers for credit. This process gives these consumers some preferential access during a credit application process.

Pre-Qualification Process

Lenders may use existing information provided by consumers. This may be from data from a previous application or because the consumer is already a customer. Creditors also have multiple relationships with credit agencies that allow them to target specific types of borrowers and obtain soft credit inquiries for pre-qualification. Soft inquiries don't affect an individual's credit score. Creditors generally target borrowers by their credit history. Relationships with credit agencies allow creditors to obtain lists of potential borrowers in their target score range and pull soft credit inquiries to determine pre-qualification offers.

Potential borrowers may receive a phone call or a letter in the mail offering a pre-qualification for a specific amount for a certain credit product. If interested, the consumer can contact the creditors to proceed with the application. A pre-qualification can help increase a borrower's chances of acceptance.

Pre-Qualification Alternatives

If a borrower doesn't receive a pre-qualification offer, there are other resources to determine if they can get pre-approved. Many creditors offer a pre-qualification tool that allows a borrower to obtain a pre-approval with a soft inquiry that does not affect their credit score. CreditCards.com is one source for obtaining these offers. Its credit matching tool provides free pre-qualifications from multiple credit providers, allowing borrowers to compare products across issuers. Credit monitoring sites like Credit Karma also offer pre-qualifications based on consumers' credit histories.

Special Considerations

Since pre-qualifications are conditional offers, they don't necessarily guarantee that a financial institution will issue someone that amount of credit or any credit at all. Pre-qualification offers are simply estimates and marketing documents that can help a credit issuer obtain new customers. If a borrower decides to apply for a pre-approved deal, the creditor still needs to obtain a hard inquiry on their credit report. This provides the lender with more comprehensive information on whether the customer actually qualifies and, if accepted, how much the creditor will lend.

Borrowers need to have a good understanding of their credit score and credit profile. Numerous credit inquiries and rejections can negatively impact a borrower’s credit score, decreasing their eligibility for obtaining credit in the future.

Pre-Qualification vs. Pre-Approval

Pre-qualification and pre-approval are unique to the credit industry. They can be a successful and profitable marketing tactic for attracting customers through direct mail via letters or emails. While they may seem similar, there are certain differences between the two.

While a pre-qualification is normally the first step in the credit marketing process, a pre-approval is the second step in the lending process. The former indicates creditworthiness, while the latter gives the borrower a more definite answer. Lenders require consumers to fill out a credit application to get pre-approval and may provide a certain credit limit after doing a review of the borrower's financial history. In most cases, the lender provides consumers with a conditional commitment. So, if a borrower has a mortgage pre-approval in hand, they can begin shopping for a home that fits into that price range.

The Bottom Line

A pre-qualification is an estimate provided by a lender or creditor to a potential borrower, encouraging them to apply for credit or a loan. A pre-qualification can be granted based on information furnished by the borrower, or it can be obtained from a review of a person's credit history from their credit report. Pre-qualifications are a conditional review of a borrower's creditworthiness and may be done before pre-approving the borrow for credit. Pre-qualifications are usually used for marketing purposes to obtain new customers.