At Homewise, we always encourage every home buyer to start the process with a mortgage pre-approval. It saves time, establishes what you can afford from the start, sets a clear shopping budget and it even gives you an edge over your competition in a bidding war. But did you know that a mortgage pre-approval can also trigger a credit check that could potentially lower your credit score? While this isn’t necessarily a reason to shy away from a pre-approval, it’s definitely something to be mindful of before getting started.
Let’s define what a credit score really means.
A credit score is a number given to you based on your repayment history of credit facilities, such as credit cards, lines of credit or auto loans. This three-digit number is important to lenders because it indicates your level of risk and the odds that they’ll get their money back from you as a borrower. Essentially, the higher your credit score, the less risk you pose. Your credit score is a key factor in determining your “creditworthiness” – in other words, your chances of qualifying for a mortgage.
How does a pre-approval affect my credit score?
As part of the pre-approval process, lenders will need to be authorized to review your credit report from a credit bureau. Once this process begins, it will prompt a hard inquiry that signals you’re looking to apply for credit. Each hard inquiry can potentially lower your overall credit score.
A credit check provides details on how the credit score was calculated to help a lender understand the amount of risk they’re taking on if they approve you. As mentioned, a strong credit score is a key determinant of your ability to purchase a home because it shows that you’re financially responsible and able to make your future mortgage payments.
When you apply for a pre-approval at Homewise, you’ll have to authorize our team to access your credit information so that we can begin reaching out to lenders. The good news is that we only need to pull your credit score once and can distribute it to various lenders, which prevents your credit being pulled multiple times and repeatedly lowering your score throughout the process.
Can I prepare my credit score for a pre-approval?
The answer is yes. You can do so by initiating a soft inquiry through your personal bank to check your credit score without penalty. If you notice that it’s on the lower end, you should avoid applying for any new credit in the interim and aim to pay off any debt owing in full each month. Over time, these small steps will significantly impact your score and ultimately get approved for the mortgage you need.
If you’re interested in getting pre-approved now, you can get started with Homewise in just five minutes. Our team will only pull your credit score once and work to get you the best pre-approval from over 30 banks and lenders.
Buying a house can be a long process, and it often begins with a mortgage prequalification. A prequalification is one step short of a preapproval, but has its advantages. Here’s what prequalification is all about, and why you might want to get prequalified for a mortgage.
What is mortgage prequalification?
A mortgage prequalification is an estimate of how much a borrower can be approved for based on income and other basic factors. The prequalification process is simpler than the preapproval process, and can typically be done through a phone call or online form that provides some financial information to a lender.
Because a prequalification simply indicates what you might be able to afford and doesn’t require official documentation, it doesn’t expire. As long as your credit and finances stay about the same (and interest rates stay relatively in the same range), the prequalification should still hold as a general idea of what you can afford.
Pros of mortgage prequalification
You’ll get an idea of your budget
One advantage of going through the prequalification process is that you’ll have a general idea of what you can afford before you shop for a home, says Mac Cregger, senior vice president and divisional manager of Angel Oak Home Loans in Atlanta.
You’ll avoid sticker shock by going through this process early, especially if you’re buying your first home.
“Sometimes buyers may have an unrealistic perception of payments on a particular home due to the way some of the information on mortgage payments may appear online,” says Craig Garcia, president of Capital Partners Mortgage in Coral Springs, Florida. “Having a strong knowledge of what a realistic payment is on a home can help buyers focus in on properties that realistically match their budgetary desires or constraints.”
Potentially, you’ll also know where you stand with closing costs, says Abel Carrasco, loan originator with Homeowners Financial Group in St. Petersburg, Florida.
“Understanding how much money you’ll need to bring to closing, including the down payment and closing costs, will help you better manage your spending and help plot a course to help you achieve your goal of homeownership,” Carrasco says.
You could be in a stronger position
A prequalification can put you in a “better negotiating position with the seller,” points out Peter Boomer, a mortgage executive at PNC Bank — although these days, a preapproval holds much more weight.
Still, being prequalified can help let the seller know “you mean business,” Carrasco says.
“It’s not uncommon in this market for sellers and their Realtors to insist on seeing a prequalification letter prior to even letting you see the home,” Carrasco says. “In a hot market, sellers don’t care to waste their time preparing their home for a showing and leaving only to have a ‘tire kicker’ traipse through their house with no means or intentions of buying it.”
You can learn more about your options
Although prequalification is not a formal process like preapproval, it gives a borrower the opportunity to provide some information to a lender on income, assets and liabilities, Cregger says.
Now that the lender has this information, you can learn about the different types of mortgages that’d fit for your situation, and potentially any first-time homebuyer programs or assistance you qualify for.
“Perhaps you are able to purchase with less of a down payment than you assumed or perhaps your credit is in better shape than you thought,” Garcia says. “Understanding your options helps you make better decisions when it comes to selecting a home.”
Cons of mortgage prequalification
It can affect your credit score
If you get prequalified multiple times over a long period, such as once in January and again in June, your credit score will be impacted. This isn’t ideal, since you’re looking to apply for a loan with the most favorable rate and terms.
If you make mortgage prequalification inquiries over a shorter window, however, they’ll have little effect on your score. That’s because credit scoring models group inquiries within a shorter period, typically 30 days, into one inquiry on your credit report. That means you should do all your shopping around in a short amount of time, if you can.
“It’s your right as a consumer to be able to shop between lenders to make sure you’re getting competitive quotes,” Carrasco says.
Once a lender pulls your credit, that same report will be used for underwriting if you submit a full mortgage application — and the lender doesn’t have to pull it again, since the report is good for 120 days, Carrasco adds.
Nothing is guaranteed
The mortgage industry does not have a defined standard on what exactly constitutes a prequalification or preapproval, Garcia says.
Most mortgage lenders consider a prequalification as a preliminary overview of a borrower’s needs and qualifications, designed to give the borrower an understanding of what may be possible. In other words, prequalifying doesn’t mean you’re guaranteed to get a loan. In fact, if the prequalification process isn’t as involved as the preapproval or doesn’t go into sufficient detail about your financial situation, you can still get denied. In this way, prequalifying can give a false sense of security.
How to get prequalified for a mortgage
Getting prequalified for a mortgage is a relatively easy process. Once you have a mortgage lender in mind, you can typically request a prequalification online or by phone. Many lenders offer a simple online form.
Be prepared to share details on your income, debt and assets — but don’t worry about providing documentation to prove this information. Once you complete the prequalification form (and if you’re deemed eligible), you can expect to be prequalified within a few hours, or up to one business day.
Next steps
If you’ve been prequalified, your next steps in the home-buying process include:
- Getting preapproved for your mortgage
- Finding a real estate agent and looking for homes
- Making an offer and negotiating terms
- Getting the home inspected and appraised
- Waiting out the underwriting process
- Closing on your loan
That first step, preapproval, can involve a lot of paperwork, so be ready. In the preapproval process, the lender reviews your credit report and financial situation and approves you for a specific mortgage loan amount. This requires submitting more detailed information, including documentation about employment, car and student loans, total savings and other debt such as credit cards.
Learn more:
- 6 steps to finding the best mortgage lender
- First-time homebuyer guide
- How long does it take to buy a house?