Right now, the mortgage market is going through a shift. Refinance requests are being eclipsed by mortgage applications for new home purchases. On top of that, housing inventory is at an all-time low.1
In this evolving housing market, mortgage lenders must update their strategies to stay competitive. One effective strategy is leveraging prequalification as a marketing tool. Prequalification has many benefits for both borrowers and lenders alike. By teaching your prospective customers about these benefits, you can pull them into your sales pipeline sooner and increase your chances of securing their business.
So, how does prequalification differ from preapproval? And why is prequalification a superior marketing strategy for lenders and borrowers alike? Keep reading to find out.
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Prequalification vs. Preapproval: What’s the Difference?
Prequalification and preapproval are two types of applications borrowers can fill out to see if they fit the criteria to qualify for a mortgage. However, they differ in important ways.
What is Prequalification?
Prequalification enables an aspiring homeowner to see if they meet a lender’s most basic mortgage requirements. It also gives them an idea of the type of home they can afford in the current housing market. The prequalification mortgage estimate they receive is based on their self-reported income and assets, bank account information, and a soft credit check.
Applying for prequalification is a quick and easy process. It doesn’t require the same amount of documentation that a preapproval application would. In turn, applicants can find out if they prequalify in as little as an hour to one business day.
Since lenders don’t verify applicants’ claims with documentation, prequalification offers may be less accurate than preapproval offers. Additionally, the offer outlined in a prequalification isn’t guaranteed.
What is Preapproval?
Preapproval means that a borrower has applied with a lender to determine their creditworthiness for a mortgage using a more rigorous application process. Preapproval applicants must undergo a hard credit check and provide the following documentation:
- Bank account statements
- Personal and business tax returns
- Investment accounts
- Divorce settlements
Since there’s so much documentation to verify during a preapproval, it may take a lender up to five to ten business days to generate an offer. However, preapproval offers tend to be more accurate and carry more weight with sellers.
That’s because being preapproved for a mortgage confirms that a borrower is eligible for a specific mortgage for a set number of months (unless their financial situation changes notably within that time).
The Purpose of Prequalification vs. Preapproval
As you can see, prequalification and preapproval serve different purposes.
Getting prequalified is a smart move for homebuyers who are just starting out their home search. It can let them know what type of mortgage they may qualify for, without going through the rigorous preapproval process. It can also alert them if their credit score needs some improvement. In many cases, preapprovals give lenders the opportunity to provide additional value adds (and bolster their retention rate) by educating the borrower on score improvement and financial education.
In contrast, preapproval enables serious homebuyers to have a mortgage offer ready to go when they find the home of their dreams. It can help them stand out in a competitive housing market where sellers and real estate agents don’t want to waste their time on ineligible house hunters. It can also help borrowers compete with the powerful cash offer that seems to be rising in popularity in the current market.
The Credit Score Impact of Preapproval vs. Prequalification
Prequalification applications use soft credit checks, so they rarely impact applicants’ credit scores. In contrast, preapproval applications use hard credit checks, which can lower applicants’ credit scores for a few months.
Since prequalification doesn’t put applicants’ credit scores at risk, aspiring homeowners may be more open to filling out this type of application early in their home search process.
How to Use Prequalification Soft Pull for Customer Retention and Lead Generation
In addition to helping borrowers, prequalification can help lenders cut costs, generate new leads, and establish ongoing relationships with prospective customers early on in their house-hunting process.
- Cut costs – Running hard credit checks on applicants can be expensive. By having potential customers apply for prequalification first, you can use a cheaper soft credit check to see if they meet your most basic mortgage requirements.
- Generate new leads – Not every aspiring homeowner is ready to apply for a mortgage right away. Many of them need to house hunt for a few months, raise their credit scores, and wait for the perfect home to hit the market. In the meantime, you can turn these house hunters into leads by having them apply for prequalification with you.
- Establish ongoing relationships – If you nurture your relationship with these leads by offering them customized credit improvement tips and other helpful mortgage information, you’ll have a greater chance of securing their business when they’re ready to buy.
As you can see, prequalification can help you get more applicants in the door and into your sales pipeline. Even if some applicants don’t qualify with you yet, you can help them get on track to be eligible in the near future.
Prequalification Lead Generation Example
Let’s take a look at an example of a prequalification marketing campaign in action:
An aspiring homeowner recently graduated from college. This applicant can afford a down payment, but they have a thin credit file due to young age and a credit score of 590. After prequalification, you and the borrower discover that they don’t qualify for a mortgage.
You provide this applicant with personalized tips on how they can increase their credit score over the next few months. They agree to pay down some debt, open up another credit card account to build out their credit history, and commit to making on-time payments for the next few months. After doing so, they re-apply for prequalification with you and meet your criteria.
Once they know they prequalify for a mortgage, this applicant can take their home search to the next level. When they find a home that’s right for them, they’ll be more likely to apply for a mortgage with you, since you helped them along their journey.
How to Educate Borrowers on the Importance of Prequalification
The value of prequalification is clear. So, how can you communicate it to borrowers?
You can motivate borrowers to apply for prequalification by explaining:
- The general credit score they’ll need to qualify – Most mortgage lenders require a credit score of 620 or above.2 Letting borrowers know about this basic qualification requirement can set them up to seek credit improvement solutions sooner than later.
- How prequalification can help them improve their borrower profile – Applying for prequalification gives borrowers a chance to receive personalized feedback from a lender. This individualized insight can help them take the necessary steps to qualify for a mortgage and eventually purchase a home.
- How prequalification can strengthen their first impression with sellers – When an aspiring homeowner is prequalified, it shows sellers how serious they are about going through with a sale. In turn, it can strengthen their position in a seller’s market with low inventory and high competition.
In summary, whether an applicant prequalifies with you or not, applying for prequalification can set them up for success and bring them one step closer to their dream of homeownership.
How to Help Pre-Qualification Applicants Improve Their Credit Scores
- CreditXpert® Wayfinder – If an applicant needs to increase their credit score to qualify for a mortgage, CreditXpert Wayfinder can show them the way forward. This tool offers personalized credit management suggestions. By sharing these suggestions with your prequalification applicants, you can help them achieve a higher credit score, earning their trust and loyalty along the way.
- Credit Assure® – Credit Assure is another tool that can help you pinpoint potential areas for credit score improvement that you can share with your prequalification applicants.
- CreditXpert® What-If Simulator – The CreditXpert What-If Simulator lets you predict how an applicant’s credit management will impact their credit score in the future. Using this forecast, you can give aspiring homeowners a clear road map of what they need to do to earn the credit score required for their desired mortgage.
Seeing how specific credit adjustments can impact an applicant’s credit score right now may give them the motivation they need to put these steps into action.
- Rapid Rescore – Once an applicant has made some positive changes to their credit management, Rapid Rescore allows you to recalculate their credit score based on their most recent improvements.
By calculating this updated credit score, you can offer eager mortgage applicants who have already found their dream home the best possible terms on their mortgage, securing their business and beating out the competition.
Certified Credit: Affordable Credit Reports and Credit Score Improvement Tools
As you can see, prequalification has a valuable role to play in mortgage lenders’ marketing strategies moving forward.
Here at Certified Credit, we have everything you need to put this marketing plan into action. In addition to our credit score improvement tools, we offer affordable Prequalification Soft Pull Reports, as well as:
- Tri-Merge Credit Reports
- Smart Select Reports
- Refresh Credit Reports
- Mortgage Comparison Reports
- Business Credit Reports
Learn more about our credit services for mortgage lenders today.
Forbes. Homebuyers Running Out Of Options As Housing Supply Hits All-Time Low.
Experian. What Credit Score Do I Need to Get a Mortgage?