Pre-approval is a term used in lending with two meanings. The first is when a financial institution has determined that a person is credit-worthy for a specific financial product. The institution guarantees approval should the person choose to accept to apply.

This term should not be confused with pre-qualification which is more common. By contrast, pre-qualification is when a financial institution has obtained data about a prospective customer but not verified it. The institution retains the right to deny an application if the applicant is merely pre-qualified.

The second use for the term pre-approval is when a mortgage company issues a letter verifying a buyer’s credit rating and income for the benefit of the seller. The document issued by the financial institution is known as a pre-approval letter.

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