When You Should Get Pre-Approved for a Loan (and When You Shouldn’t)

Getting pre-approved for a loan can be a valuable step when preparing for a major purchase like a home or car, as a pre-approval gives you an idea of how much financing you may qualify for, based on a preliminary review of your income, debts, and credit history by a lender—but you should consider your circumstances and the timing before getting one Here's a look at why a pre-approval matters, how it impacts your credit, and how to determine when you should get one.

The benefits of getting a pre-approval for a loan

The key advantage of pre-approval is that it allows you to shop with confidence, as you'll have a better idea of your approximate budget and price range. It also demonstrates to sellers that you're a serious, creditworthy buyer. Having a pre-approval letter in hand can give you an edge over other bidders when you're purchasing a home, for example.

Additionally, the pre-approval process helps identify any potential issues with your credit report early on. This gives you a chance to correct errors or work on improving your credit profile before officially applying for the loan.

The difference between pre-qualification and pre-approval

In contrast to a full pre-approval, lenders may also pre-ualify you for a loan. Though they sound similar, the two are significantly different, and It's important to understand the nuances involved. A pre-qualification is issued based only on self-reported information you provide to the lender. Think of it as simply an initial estimate of what you might be able to borrow, based on your own accounting of your savings and income.

Pre-approval, on the other hand, requires the lender to pull your credit report and verify other financial details, like the amount of money in your bank account and your annual income. This formal process provides a more accurate and reliable assessment of your loan eligibility.

How a loan pre-approval impacts your credit

One concern with obtaining a pre-approval is the potential effect on your credit score. It's true that when you formally apply and the lender does a "hard" credit pull, your score may dip slightly. However, if you rate shop with multiple lenders within a short window (around 14-45 days), these multiple inquiries will be recorded as a single hard inquiry, which will minimize the impact on your credit score.

It's a different story with a simple pre-qualification: For those, most lenders use a "soft" credit pull that doesn't impact your credit score at all, so getting pre-qualified with several lenders to compare initial loan estimates is perfectly acceptable.

When you should get a loan pre-approval

The ideal time to get pre-approved for a loan is two to three months before you plan to make your large purchase. This gives you enough time to clear up any issues with your finances, but ensures the pre-approval will still be current when you need it, as pre-approvals are generally only good for 60 to 90 days.

Pre-approval is recommended if:

• You're seriously shopping for a home or car

• You want to get prequalified loan estimates to compare options

• You've found a specific property and want to make a competitive offer

• Your credit is good and you want to demonstrate your buying power

When to hold off on getting pre-approved for a loan

There's no benefit to getting pre-approved for a loan a year or more before you'll actually need the financing, as again, pre-approvals typically expire within 60-90 days.

You may also want to delay pre-approval if:

• Your credit score needs significant work

• You're just starting to think about a future purchase

• Your income situation is unstable or in transition

How to time your loan pre-approval

While pre-approval can be advantageous when making a major purchase, getting one too early can have a negative impact on your credit score if the pre-approval expires and you have to apply for another one after the aforementioned multiple inquiries window has closed.

Ultimately, thoughtful preparation and smart timing of your pre-approval application can simplify securing financing and keep you loan-ready without excessive credit checks. Consider getting pre-qualified first to get a rough idea of your purchasing power before pursuing an official pre-approval.