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

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, and they're sometimes used interchangeably even though they're two different things. 

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. By the time you're done reading this, you'll have a good grip on the ins and outs of prequalification vs. pre-approval for HELOCs and home equity loans.  

What is prequalification for a HELOC or home equity loan?

Prequalification for a home equity loan on HELOC is a process where the lender looks at your financial situation to find out if you can get a loan. If you pass, prequalification can also give you an idea of how much money you could borrow. 

To prequalify for a home equity loan, you’ll typically be asked for basic information, like your name, income, and the last four digits of your Social Security number. In short, the lender wants to know about your current financial situation and to take a look at your credit history.

Here’s why that’s a good thing: If a lender checks you out and doubts that you will qualify for a loan, you won't need to waste your time—or a hard credit pull—on a full application. 

Many lenders run a soft credit check rather than a hard one during the prequalification process. While a hard credit check could cause your credit rating to dip, a soft check does not impact your credit.

Once you receive prequalification, the lender will usually 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 know more based on what they've already learned about you. It's not a guarantee of anything, but it can be a good sign.

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

Pre-approval for a HELOC or home equity loan usually happens after prequalification. This is when the lender typically 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 generally three situations that may cause the lender to back out after offering pre-approval:

• Your credit standing takes a hit. Lenders typically review your credit report twice: The first look is before offering pre-approval, and the second time is before the loan is finalized. If anything changes within that time frame, like a late payment being reported to the credit bureaus, the lender could reevaluate your ability to repay the loan. 

• Your debt balances increase 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 could 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. 

Is HELOC pre-approval a soft pull? 

A HELOC pre-approval usually involves a hard credit pull, although the policy varies by lender. Most of the time, you can expect a lender to pull your credit report for a comprehensive look at your financial situation. 

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

Prequalification and pre-approval have several primary differences, the main one being how hard the lender looks at your qualifications. In general: 

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

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

Neither prequalification nor pre-approval are a guarantee. In either case, the lender could still deny you a loan when you fill out a formal application, especially if there are changes to your credit, income, or job standing before you apply.

Pros and cons of prequalification and pre-approval 

Like many other financial strategies, home equity loan and HELOC preapproval and pre-qualification both have pros and cons:

Prequalification pros

• Most lenders conduct a soft credit check that doesn’t impact your credit score.

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

Prequalification cons

• Prequalification isn’t a definite "yes." You'll still have to wait for pre-approval. 

• You're offered just an estimate of how much you could borrow and at what rates. Those numbers could be different if you apply.

Pre-approval pros

• You're being told that you should qualify for a loan if you apply. 

• As long as everything stays the same, you usually have a good chance of being approved for the rates and terms provided in the pre-approval notice.

Pre-approval cons

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

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

When should you get prequalified or pre-approved?

Both prequalification and pre-approval take place before you fill out a formal application for a loan. First, compare your options for home equity loan or HELOC lenders to be sure you've chosen the right one. Pre-qualification could be useful here to compare potential loan details.

Once you're prequalified, you'll typically be given the terms of the loan, like the interest rate you might qualify for and how much money you could borrow. If you're happy with the details, it's time to move on to pre-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. 

For pre-approval, the lender will take a deeper dive, asking you to provide documentation. To speed up the process, you may want to gather the following:

• A current photo ID

• Pay stubs

• W-2s from the past two years

• Tax returns

• Bank statements

• List of debts

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.