How to Get Preapproved for a Loan
What you Need for a Proper Preapproval
Whether you need money for a house, a car, or a credit card, getting preapproved for your loan makes things easier. You’ll know how much you can spend, you’ll be in a better position to negotiate, and you’ll understand the costs of your loan before you end up in something that you can’t afford.
How do you get preapproved for a loan? Gather information about your finances and the loan you need, and submit an application.
Follow the steps below to make the process easy.
Manage Your Credit
Your credit is crucial to almost any loan. Unless you’re getting a payday loan (which is probably not a good idea) lenders are going to look into your borrowing history. Make sure they – and you – won’t get any nasty surprises when that happens.
Get familiar with credit: your credit is one of the most important factors for getting preapproved. Understand how it works and what lenders are looking for.
Check your reports: order your credit reports to see what they contain. This is free for all US consumers – once per year, you’re entitled to see your credit reports from each credit bureau. Look through the report and see if any late payments or errors appear in your reports.
Fix errors: if there are errors in your credit reports, fix them. The Federal Trade Commission (FTC) reports that five percent of consumers have errors in their reports.
While that number isn’t outrageous, the consequences of an error are severe and could ruin your chances of borrowing. Report the errors to the credit bureau and any lender that’s reporting the error. Learn more about fixing errors.
Lenders will ask for information about your finances in order to evaluate your loan application.
Gather this information ahead of time so that it’s easy to apply – and to give yourself a refresher on your finances. It’s helpful to see up-to-date information on your income and assets before you take on additional debt.
Ability to repay: you’ll need to document how much you earn. Lenders want to see (and they’re increasingly required to ask) that you have sufficient income to take on any new loans. Typically, they calculate a debt to income ratio, which looks at how much you earn compared to how much you pay out each month. With some lenders, you need a debt to income ratio below 36% to get approved, although others let you go higher.
It may also help to show that you have other assets available to you (such as cash in bank accounts) as an extra cushion. Your lender may ask for the following items, and more:
- Pay stubs from your current job
- W-2 statements from the previous year
- Tax returns from previous years
- Bank account statements
- Other account statements
You might not need to actually provide copies of all of these documents in order to get preapproved, but you should at least find out where they are and get familiar with them. Any information you provide on a loan application needs to be accurate, so you’ll need the information anyway.
Details about your purchase: you might also have to provide information about the thing you’re buying with the loan money. The more detail you have, the better – your lender’s offer may change depending on how you intend to use the money. For example, when buying a house, is it a single-family residence, or is it a condo unit in a building with 50 units? If it’s a car, what is the make, model, and year? Used car loans are different from new car loans.
Pick a Lender
At this point, you’re ready to shop around for lenders. You probably only need to get preapproved with one lender to start shopping (and using a preapproval letter as leverage), but it’s worth comparing loan costs among several lenders. You’re not obligated to use a lender that preapproves you, but you might as well go through the process with lenders offering the best terms – otherwise you’ll have to do everything multiple times.
Check with a variety of lenders: include several lenders – and several different types of lenders – in your search. Try a bank and a local credit union for home, auto, and credit card loans. For personal loans, be sure to include an online lender or P2P lender (they often have competitive rates, and they’re sometimes willing to work with borrowers who have less-than-perfect credit).
Get complete information on how much you’ll pay, including:
- Origination or processing fees
- Interest charges (is the rate variable or fixed?)
- Prepayment penalties, if any
- Annual fees
Are you pre-qualified? For credit card loans, some lenders keep a list of borrowers who are “pre-qualified.” If you’re on that list, there’s a decent chance that the lender wants to work with you. However, there’s no guarantee that you’ll be approved – you still need to submit an application, and the lender might find something they don’t like. That said, there is at least something in a database somewhere that the lender likes about you. If you’re not pre-qualified with a particular lender, you can still apply and see what they say.
Apply for the Loan
Once you’ve picked a lender and prepared yourself, it’s time to apply. There’s only one way to find out how much you can get: fill out an application and wait for an answer.
An answer may come quickly, or it may take longer. Answers for auto loans might come more or less instantly. Home loans can take notoriously long, with lenders asking for a seemingly endless list of documents. That said, some lenders do a more abbreviated once-over when you get preapproved, so the process is typically faster than a complete underwriting.
False hope? Be aware that some lenders claim to preapprove you without really looking at your finances. If they don’t run your credit or ask about your income, it’s a bad sign. In order for the preapproval to mean something, they need to actually evaluate your creditworthiness. It doesn’t do you much good to get “preapproved” only to find that you need to start over (because you can’t borrow nearly as much as promised).
To avoid that problem, work with reputable lenders – banks and credit unions in your community, as well as legitimate online lenders. Avoid fly-by-night outfits and anybody who claims “we approve everybody.”