Initial loan approval

By Nooreen B
Modified on January 11, 2024
Initial Loan Approval

Initial loan approval is one of the first steps of a loan application. Lenders will use this process to determine whether they want to move forward with an applicant. If you are applying for any loan product or credit line, knowing more about this type of loan approval will definitely be helpful. Below you will find everything you need to know about initial loan approval. 

What Is Looked With Initial Loan Approval?

In most cases, with early loan approval/initial underwriting approval, lenders will look at your income and conduct a soft credit inquiry. When it comes to income, they will ask about it usually in annual terms. If you are applying with a joint applicant, you can also include their income. A soft credit inquiry will not show up on your credit history and will not impact your credit scores. If an asset is involved with a loan, lenders may ask for some basic information about it in the beginning. 

What Happens After Initial Loan Approval?

Once you move forward with initial loan approval, you’ll be closer to final approval. For final approval, here is what most lenders will ask for/about: 

Documentation Proving Income

Your income will be a considerable part of your application for any loan or credit product. Your loan officer will want to ensure that you can repay the borrowed funds on time, and your income is a huge indicator of that. In most cases, you can use financial documents like invoices, tax returns, bank statements, etc., for your loan application.

Proof of Residency

Another essential part of the application process is the verification of your address. This will ensure that a lender can contact you if needed at the correct residence. Use documents like a lease agreement, the title of your home, bank statements, pieces of mail, etc. 

Documentation on an Asset (If Applicable)

If an asset is involved with your loan, then documentation about it will be a part of your loan process. For example, if you are applying for a car title loan, you will need the car’s title, which proves ownership of the vehicle. 

Another large part of final approval is a hard credit check. A hard credit check will give your lender all the information they need for the final underwriting process. With a hard credit inquiry, they will be able to see all your information on your credit report, which includes things like your payment history and the amount of total debt you have. Remember that a hard credit inquiry will bring down your credit score a few points, so it is best to space them out.  

Less common than the other requirements listed above, lenders may ask to talk to references. References can sometimes be helpful when it comes to character traits. However, this is becoming less of a common thing for many financial products. 

How Long Does Final Approval Take?

Final approval for a loan will largely depend on the type of loan you are applying for. When you apply for a payday loan, small personal loan, or credit card, you can expect a response in about two to five business days. While something like a mortgage can take up to two weeks or so.   

What Kinds of Loans and Credit Have Initial Loan Approval?

Many loans and lines of credit have initial loan approval; here are some: 

A Mortgage Loan 

Mortgage approval has several long and complicated initial loan approval processes because of the large loan amount and of such a significant asset. If you haven’t gone through the mortgage process before, you may not know about what you need for conditional approval

In the beginning, your mortgage officer will ask for some specifics, including verification of income, employment information, the joint borrower’s information (if applicable), social security information, and general expenses. In most cases, conditional loan approval with a mortgage loan process also includes a hard credit inquiry. If you want to move forward with your mortgage broker, you will need to fill out an official mortgage application.

Once this information is sent in, your mortgage loan officer will give you a loan estimate of the maximum home loan amount you can borrow. With this pre-approval process, you can begin looking for homes. Once you find a home you want to put an offer in, there is another mortgage underwriting process to verify things like closing costs, the down payment, and fill in any holes in the loan file for income and asset documentation. 

As you get closer to the closing date, your mortgage lender will let you know more about closing documents, catch you up on closing disclosure, and let you know the final amount you will need at closing. 

A Personal Loan

A personal loan is one of the most flexible loan types out there and can be used for all kinds of expenses. Loan amounts can range from a few hundred dollars up to a few thousand, depending on the lender you choose to work with. You can find a personal loan at a bank, credit union, or private lender. 

A standard personal loan is unsecured, meaning no asset is involved in the process. And so, in most cases, with personal loan approval, you won’t need to provide any information on an asset since there is none. 

Most of the time, you can apply for initial approval online or over the phone with personal loans. Personal loan pre-approval will usually involve income estimates and a soft credit pull. 

A Car Title Loan

A car title loan is a secured loan that uses a borrower’s vehicle as collateral. The loan amount and eligibility will primarily be based on the vehicle’s value. Because the car is a large part of the process, pre-approval for a title loan will involve lots of documentation and information on the vehicle. 

A Credit Card

A credit card is a revolving line of credit which means it can be used several times until your credit limit is reached. Once you pay the card, you can continue using it until you reach your credit limit again. Many credit card companies offer a pre-approval process that mainly checks your income and pulls a soft credit check. 

What Types of Loans Don’t Have an Initial Loan Approval?

A few kinds of loans don’t have initial approval, mainly because these loans are for minimal amounts and have high-interest rates. These qualities compensate for an easy approval process. While in some cases there is no pre-approval because the funds may already be coming from an existing credit account. Here are some examples: 

Payday Loans

Payday loans are short-term, high-interest loans available for all kinds of credit histories. In most cases with these loans, there is not even a soft credit pull; lenders will just need to verify your income and will base approval on that. Although these loans may seem like a good idea, they usually lead to a cycle of debt. 

Credit Card Cash Advances

Credit card cash advances allow credit card holders to borrow from their credit limits as cash instead of a credit transaction. Because you are already pulling from an existing credit card, there is no need for an approval process. One thing to keep in mind is that these cash advances have higher interest rates than credit transactions and are usually very limited. 

Credit Card Limit Increases

Credit card limit increases add to your purchase power with a credit card by increasing your available credit. Although there will not be a formal approval process, lenders will look at things like payment history and whether your income has increased for approval. You can request credit limit increases. You may also sometimes get them without asking. 

No Credit Check Loans

You will find many loans labeled as no credit check loans; payday loans usually fall under this umbrella. As the name suggests, these loans do not come with a credit check, and the screening process is minimal. However, with this ease of approval comes high-interest rates, low loan amounts, and extremely short repayment terms.  

And so, although they may sound like a convenient option, you should think twice about taking on these loans. If you have a limited credit history, there are smarter ways to build your credit and borrow funds. Look into credit builder loans, secured credit cards, getting a cosigner for your loan, or becoming an authorized user on another person’s credit cards. 

The Bottom Line With Initial Loan Approval 

Many loan options will have initial approval, also called pre-approval or pre-qualification. It gives a lender a good idea of what kind of financial situation an applicant is in. For smaller loans, the process usually involves a soft credit check and a rough estimate of income. For larger loans, like a mortgage, initial approval can come with several steps. Pre-approval provides protection for the lender, but in a way, it protects you too. Loans without credit approval usually come with extremely high-interest rates, which means a high cost to borrow funds. 

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