Couple going over finances before pre-qualifying for HELOC

Home Equity Loans

Prequalification vs. pre-approval for HELOCs and home equity loans

Sep 12, 2024

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Written by

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Reviewed by

Key takeaways:

  • Prequalification and pre-approval are two very different things.

  • To get prequalified, you provide basic details to the lender and they let you know if you might qualify once those details check out.

  • For pre-approval, the lender verifies financial details that you provide. In many cases, when the lender says you're pre-approved, they are saying that as long as nothing changes between now and the loan's signing, they are willing to give you the loan. It’s a tentative commitment, not a guarantee that you’ll get the loan. 

If you've ever applied for a home equity loan or home equity line of credit (HELOC), you've probably heard the terms prequalification and pre-approval. Don't feel bad if you don’t know the difference between the two. They sound so much alike it's enough to confuse anyone. Here, we'll clear up the confusion, making it much easier to nod confidently the next time a loan officer tells you that you've been prequalified or pre-approved. 

What is prequalification for a HELOC or home equity loan?

At the beginning of the home equity loan process, you’ll be asked for basic information, like your name and Social Security number. The number of questions you’re asked varies by lender. In short, the lender wants to know more about you and take a peek at your past experiences with credit.

Here’s why that’s a good thing: If a lender checks you out and doubts that you will qualify for a loan, they won't waste your time. Another good thing about prequalification is that many lenders run a soft credit check rather than a hard one during the prequalification process. While a hard credit check can cause your credit rating to dip, a soft check does not impact your credit.

Once you receive prequalification, the lender will tell you more about the interest rate you might qualify for and give you an estimate of your borrowing capacity.  

When a lender tells you that you’re prequalified, they’re saying that you might qualify for a loan. It’s like being asked out on a second date. They would like to see more based on what they've already seen.

What is pre-approval for a HELOC or home equity loan?

During HELOC or home equity loan pre-approval, the lender dives into your application more deeply, verifying your credit standing, employment, income, debt, and savings. If prequalification is like being asked on a second date, pre-approval is like a marriage proposal. In short, the lender wants to commit to you. There are three situations that could cause the lender to back out after offering pre-approval:

  • Your credit standing takes a hit. If you make a late payment following pre-approval, it could  be reported to at least one of the three major credit bureaus—TransUnion, Equifax, or Experian.  Lenders typically review your credit report twice. The first look is before offering pre-approval, and the second time is after the hard credit pull has occurred and the loan application submitted. If anything changes within that time frame, the lender will reevaluate your ability to repay the loan. 

  • You make a large purchase after receiving pre-approval. Your pre-approval was based on the debt you carried when you applied for the loan. Taking on new debt after pre-approval may push your debt-to-income ratio too high for the lender to remain confident that you can make the monthly payments. 

  • There are changes to your income or employment. An income or employment status change will cause the lender to reassess your loan. However, that doesn't mean that the lender will definitely back out. Let's say you're transitioning from one job to another, but they're in the same field and your income remains stable. That's less risky than switching job fields entirely or accepting a lower-paying position. 

Note: The lender typically conducts a hard credit pull to offer pre-approval. Hard checks usually cause a slight, temporary dip of your credit score. 

Key differences between prequalification and pre-approval for HELOCs and home equity loans

The critical difference between prequalification and pre-approval is this: 

  • Prequalification typically means, "We think you'll be able to qualify for this HELOC or home equity loan."

  • Pre-approval means, "You have everything we're looking for in a borrower. And as long as things remain the same, you qualify for this loan." 

While prequalification and pre-approval are quite different, they're both tied to your credit report and can be revoked if your credit report, job or income significantly changes. 

Pros and cons of prequalification and pre-approval 

Prequalification pros

  • Most lenders conduct a soft credit check without impacting your credit score.

  • Once prequalified, you're given loan details, including the interest rate, how much you might qualify to borrow, and how much you could pay in loan fees.

Prequalification cons

  • It's not a final, definite "yes." You'll still have to wait for pre-approval. 

  • You're only offered an estimate of how much you can borrow. 

Pre-approval pros

  • You're being told that you do qualify. 

  • As long as everything stays the same, you typically have no more hoops to jump through or qualifying information to provide.

Pre-approval cons

  • If your employment, income, or credit report changes before you close, the lender can choose to decline your loan approval . 

  • Your credit report will likely take a slight, temporary dip when the lender conducts a hard credit check. 

When should you get prequalified or pre-approved?

One of the most important things you can do before settling on a home equity or HELOC lender is to shop around. Once you're confident a lender has what you're looking for, it's time to get prequalified.

Once you're prequalified, you'll learn the details of the loan, like the interest rate you might qualify for. If you're happy with the rate, loan fees, and loan term, it's time to provide the lender with the documents typically needed check forpre-approval. Required documents are likely to include:

  • Permission to run a hard credit check

  • Pay stubs

  • Tax returns

  • Homeowners insurance policy

  • Recent mortgage statements

  • Real estate appraisal (how lenders handle this varies)

  • Bank statements

Prequalification and pre-approval for personal loans

Prequalifying for a debt consolidation personal loan is similar to prequalifying for a HELOC, minus the need to provide information about your home. In short, you'll be asked to supply basic information, like your name and annual earnings. If the information you provide leads the lender to believe you have a good chance of loan approval, it will let you know that you're prequalified. 

To be pre-approved, the lender will take a deeper dive, asking you to provide documentation. To speed the process, you may want to have a current photo ID, pay stubs, tax returns, and bank statements ready to share. A lender wants to know that you can easily make the monthly personal loan payments and that you're not getting in over your head. 

What's next

If you're serious about a home equity loan or HELOC, your first task is to review your household budget. For a moment, forget about what a lender will think. Are you 100% confident you can make the monthly payments with no problem?  With a home equity loan or HELOC, your home acts as collateral. If you fail to make payments, the lender can repossess your property, sell it, and recoup its losses. 

Once you're confident that you can make the payments (and have a plan in place in case of job loss or serious illness), it's time to shop for the lender that best meets your needs. 

Author Information

dana-george.jpg

Written by

Dana is an Achieve writer. She has been covering breaking financial news for nearly 30 years and is most interested in how financial news impacts everyday people. Dana is a personal loan, insurance, and brokerage expert for The Motley Fool.

Jill-Cornfield.jpg

Reviewed by

Jill is a personal finance editor at Achieve. For more than 10 years, she has been writing and editing helpful content on everything that touches a person’s finances, from Medicare to retirement plan rollovers to creating a spending budget.

Frequently asked questions

Typically, prequalification is based on self-reported financial information. It's only once you move toward pre-approval that the lender requests documents.

It depends on the lender. While some lenders will conduct a hard credit check during pre-qualification, many do not. Be sure to ask a lender about the type of credit check it runs before filling out an application. 

Pre-approval varies by lender but typically lasts between 30 and 90 days. If you're shopping around and need more time, ask each lender how long its pre-approval lasts.

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Home Equity loans are available through our affiliate Achieve Loans (NMLS ID #1810501), Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Home loans are a line of credit. Loans are not available to residents of all states and available loan terms/fees may vary by state where offered. Line amounts are between 15,000 and $150,000 and are assigned based on debt to income and loan to value. Example: average HELOC is $57,150 with an APR of 12.75% and estimated monthly payment of $951 for a 15-year loan. Minimum 640 credit score applies to debt consolidation requests, minimum 670 applies to cash out requests. Other conditions apply. Fixed rate APRs range from 8.75% - 15.00% and are assigned based on credit worthiness, combined loan to value, lien position and automatic payment enrollment (autopay enrollment is not a condition of loan approval). 10 and 15 year terms available. Both terms have a 5 year draw period. Payments are fully amortized during each period and determined on the outstanding principal balance each month. Closing fees range from $750 to $6,685, depending on line amount and state law requirements and generally include origination (2.5% of line amount minus fees) and underwriting ($725) fees if allowed by law. Property must be owner-occupied and combined loan to value may not exceed 80%, including the new loan request. Property insurance is required as a condition of the loan and flood insurance may be required if the subject property is located in a flood zone. You must pledge your home as collateral and could lose your home if you fail to repay. Contact Achieve Loans for further details.

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