Mortgage prequalification provides a basic estimate of the amount of loans that lenders may expand you to fund your home purchase. It’s not as specific as pre-approval for a mortgage, but it helps you give you a sense of what you qualify for. But does prequalification affect your credit score? Let’s take a closer look.
What is pre-qualification for a mortgage?
Pre-qualification for a mortgage is an estimate of how much a borrower can approve based on his income and financial obligations. Think of it as the first step to gaining a sense of how many homes you can buy and, more specifically, how much you can fund. The main advantage of prequalifying for a mortgage is that this estimate will help you with your home’s purchase price and down payment budget.
The prequalification process is easier than the pre-approval process. Usually you can complete it with the lender via a call or online form asking for some basic financial information (usually your income, liabilities, assets).
How good is prequalification?
There’s no need to worry about how long it’s best because your prequalification hasn’t expired. Once you have prequalified with the lender, you will receive a prequalification letter specifying that the lender is happy to borrow from you. The amounts eligible should not be changed unless the financial situation changes.
Please note that pre-qualification is not a formal guarantee of a loan. You will need to apply for a mortgage to receive your funds in advance.
Does prequalification affect your credit score?
Prequalification is a preliminary step that does not affect your credit score, as it only includes what is called a soft credit inquiry.
“Mortgage prequalification doesn’t affect your credit score like mortgage preapproval,” says Troy Robillard, a licensed real estate agent at Premiere Plus Realty, a company with offices in Florida. “This is because the lender doesn’t actually make a loan commitment when you prequalify. They’re just giving you an estimate of how much you can borrow.”
To get prequalified, you will need to provide the lender with basic financial information such as income level, head amount, and amount you want to borrow. Lenders use that information along with soft credit checks to provide ideas about which mortgage rates may qualify and what your monthly mortgage payments are.
Soft Credit Enquiries vs. Strict Credit Enquiries
Technically, a lender’s quick credit check is a “soft pull” in your credit history. Such soft enquiries will not appear on your credit report and will not affect your credit score. At the end of the lender, they will look at a snapshot of your credit history.
In contrast, hard pull is a formal, more detailed investigation into which the borrower must grant permission. The lender will do a hard pull when you consider you for pre-approval of your mortgage. This is a more thorough process. A hard pull can appear on your credit report and affect your credit score.
“In my experience, credit runs around town can reduce your score by 5-10 points, but one pull has little effect on your score,” says Steve Hill of SBC Lending, a brokerage in Southern California.
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Even multiple hard pulls by mortgage lenders may not have much impact on your credit score if they are done within a month or so. Credit Bury will not draw you on multiple applications made in a 45-day window where you are shopping for the same mortgage (smart home hunters should).
How to improve your credit before getting a mortgage
Ideally, before getting a mortgage, it’s best to check your credit report to see what your lender looks at. If your credit score is a little low, use these strategies to improve your credit.
- Create a stable payment history for your lenders. Payment history accounts for 35% of your credit score, so paying on time is the most effective way to increase your score.
- Reduce credit usage: You want to keep your balance low against your credit line. If you have a credit card with a $2,000 limit, you don’t want to exceed 30% usage (approximately $650). Doing this indicates that the lender can use it responsibly.
- Have a good credit mix: Mortgage lenders want to ensure that they can make timely payments in installments (cars, students, personal loans) while balancing their revolving credit lines (credit cards).
- Report inaccurate information: If you find any incorrect information about any of your credit reports, contact the credit department and follow the tips to challenge the item.
Ultimately, you want your credit score to be above 700, allowing you to access low interest rates. This reduces the total cost of a mortgage and gives better approval candidates.
Pros and cons of prequalification
While prequalifying for a mortgage can be a beneficial step, there are also some drawbacks to consider.
Pre-qualification professional for mortgage loans
- Get a better understanding of your budget: “We’re accused mortgage broker David A. Krebs, licensed mortgage broker at Dak Mortgage in Miami, Florida,” said: Avoid sticker shocks by taking this process early, especially when purchasing your first home.
- Better appeal to sellers: Qualification in advance will put you in a “more competitive position in the bidding process,” says Robilard. Some real estate agents and sellers may request a prequalification letter before looking at the property, especially in markets in which there is more demand. After prequalification, “you will receive a prequalification letter similar to the prequalification letter,” says Krebs. “Please note that we may not carry the same weight (as pre-approved by the home seller) as it is based on limited information.”
- Learn more about your loan options: Although prequalification is not as much a form of process as pre-approval, borrowers give lenders the opportunity to provide some information about income, assets and liabilities. Now that your lender has obtained this information, they may notify you of the different types of mortgages that suit your situation, as well as potentially first-time home buyer programs and qualifying assistance.
- Organized: Applying and obtaining prequalification will help you take stock of your finances. You may learn to buy with less money than you thought, or discover that your credit score needs a boost. By taking this first step, you can make more informed decisions as you move towards homeownership.
Cons of pre-qualifying for a mortgage
- That’s not a guarantee: The purpose of prequalification is to provide a general estimate of the size of the mortgage you may qualify for. However, lenders are not actually making loan commitments. This can cause challenges later if you are not qualified to just predict what you want.
- It doesn’t hold as much weight as the pre-equipment: Prequalification is not a guarantee from the lender, so if you are negotiating with the home seller, you will not carry the same weight. Taking extra time to approve in advance is a better way to show sellers that you are a serious buyer.
Do I need to prequalify for a mortgage?
There are a few important considerations to keep in mind when pondering whether to prequalify for a mortgage.
Perhaps the biggest question is, where are you on your home-being journey? Getting prequalified can be a more valuable step before you actually start shopping at home and simply want to get a general idea of how much you qualify. Doing so will help you set a budget to buy a home.
Prequalification is also a good idea if you are still learning about the various mortgage options and are interested in what kind of mortgage you can get.
However, if you already find a home that you want to hunt or offer, you may opt for pre-approval of your mortgage as it shows the lender’s commitment to funding the loan rather than pre-qualification. This is especially useful if your home seller has received multiple offers and wants to know that you are a serious potential buyer.
Next Step: How to Get Prequalified
Getting prequalified for a mortgage is a relatively simple process. This is the way.
- Research lender: The first step to getting prequalified is to research and compare different lenders, including reading lender reviews online from previous clients.
- Rate comparison: Make sure to compare interest rates when shopping or researching mortgage lenders. Getting the most competitive interest rate possible will save thousands of people over the life of your loan.
- Request prequalification: With mortgage lenders in mind, you can usually request pre-qualification online or over the phone. Many lenders offer simple online applications.
After obtaining your qualification in advance, you can shop for the home. At the very least, you can know which categories you want to view on the real estate website. You can also tour some properties on hand, prequalified letters. As far as you understand, as long as you understand it is a rough estimate rather than a binding offer, there are no drawbacks to prequalification.
Think of it as the first step on your path to getting your mortgage. Next step? Go for pre-approval – a more dedicated agreement from the lender, lending a certain amount. You can then start a serious bid for that dream home.
