Pre-approval Definition

Pre-approval has two broad meanings within the personal finance realm:

  • A lender may review a potential borrower’s credit history and determine the buyer will meet or exceed all lending qualifications; the buyer is then notified-usually by bulk mailing-that they have been "pre-approved" to borrow a certain amount of money. Although the phrase "pre-approval" suggests the loan process to be automatically successful, such usually is not the case-in fact most "pre-approved" credit card advertisements are more akin to pre-qualification advertisements.
  • Potential homebuyers can often meet with their financial institution and become pre-approved for a mortgage; the lender will set a maximum amount for the mortgage loan and any property less than that amount can then be purchased. This process gives the potential homebuyer some leverage in the purchasing process because they can demonstrate to any seller their ability to obtain financing.