Prequalification Explained: An Estimate, Not a Promise

Prequalification is a forecast based on what you tell the lender

When you prequalify, you share your income, housing cost, the amount you want and the reason for the loan. Many lenders then pull a soft version of your credit report and show you a likely rate, amount and term. You haven't applied yet, and the lender hasn't committed to anything.

The CFPB notes that lenders don't use these labels consistently. One lender's "prequalification" relies on what you report without checking it; another's "preapproval" comes only after it verifies your information. Neither is a loan commitment. Read the fine print on each lender's page: it should say what kind of credit check it uses and what the estimate is based on.

Prequalified, preapproval, prescreened and applied

Terms overlap, so judge an offer by what the lender actually did. If it verified your pay stubs and pulled a full report, the number is more reliable than one produced from a short web form in thirty seconds. Either way, nothing is final until you've seen the Truth in Lending disclosure with the APR, finance charge, amount financed and total of payments.

Why your final rate can come in higher

A prequalified range is only as good as the information behind it. Say a lender shows you 14% to 19% on $10,000 over 36 months. That's a wide band in dollars:

The final number often moves for one of these reasons:

• Verified income is lower than you estimated, or harder to document if you're self-employed.
• Your full report shows more debt or a recent late payment the soft check didn't weigh the same way.
• You changed the request: a larger amount or a longer term usually prices higher.
• Time passed. Estimates expire, and a new card balance or a missed payment can change your profile.
• The estimate assumed a discount, such as autopay, that you didn't set up.

If the final offer is higher, you don't have to take it. Federal law requires the full cost disclosure before you sign, so compare it with your other estimates first.

Turned down before you even applied

A lender that evaluates your credit and decides you don't qualify generally owes you an adverse action notice, even when you never filed a formal application, the CFPB says. Under Regulation B the notice comes in writing, generally within 30 days, and either lists the main reasons or explains how to request them within 60 days.

If a credit report played a part, the notice also names the bureau, includes the score used and tells you that you can get a free copy of the report within 60 days and dispute errors. That free report is worth pulling: a mistake caught now helps with every lender you try next.

The "you're prequalified" letters in your mailbox

Those letters are prescreened offers. A lender gives a credit bureau its criteria, and the bureau returns a list of people who match. The FTC says prescreening doesn't hurt your score, though the inquiries appear on your report, and that you can be turned down only in limited circumstances once you respond.

A prescreened offer isn't automatically a good one. It shows what one lender wants to sell you, not what the market would give you. Compare it like any other estimate.

• To stop most of these offers for five years, call 1-888-5-OPT-OUT (1-888-567-8688) or use optoutprescreen.com.
• To stop them permanently, start online or by phone, then sign and mail the Permanent Opt-Out Election form.
• Requests are processed within five days, but offers already in the pipeline can keep arriving for several weeks.

How to prequalify in one afternoon

1. 1 Decide the amount and term first. Use the same figures with every lender, or the estimates won't be comparable. The loan payment calculator shows what each term costs per month.
2. 2 Use real numbers. Enter the income you can document, not the income you hope to have. An inflated estimate just moves the disappointment to the application stage.
3. 3 Get three to five estimates from a mix of banks, credit unions and online lenders. You can also request offers through Lendmira's Check your rate form; Lendmira doesn't lend or check your credit, and each lender that responds sets its own terms.
4. 4 Record APR, fee, payment and total of payments for each one, not just the headline rate. Our guide to comparing loan offers walks through an example.
5. 5 Apply formally to one lender, ideally within a short window, and keep your other estimates as a fallback if the final offer moves.

If none of the estimates fit your budget, that is useful information too. The step-by-step borrowing guide covers what to do before you try again.

Common questions