Does Prequalifying for a Mortgage Hurt Credit?

No, and it can have many advantages for home buyers

Fact checked by Betsy Petrick

With homes selling quickly these days and often receiving multiple offers, would-be buyers face stiff competition. One way to give yourself an edge is to get prequalified for a mortgage with one or more banks or other lenders. Prequalification is a relatively simple process and will not affect your credit score. Here is what you need to know and do.

Key Takeaways

• Mortgage prequalification typically involves a soft credit inquiry, which does not affect your credit score.
• Prequalification can offer significant advantages, such as helping you determine how expensive a home you can afford and making you a more attractive buyer to home sellers.
• Preapproval is a similar process but can affect your credit score.
• There are ways you can protect your credit score during the home buying process.

Understanding Mortgage Prequalification

To prequalify you for a mortgage, a lender will want some basic financial information. That could include, for example, your current income and how much you have saved for a down payment. The lender might also run a soft inquiry on your credit report. Armed with this information, the lender may prequalify you and also provide an estimate of how much it could be willing to lend you—although that is not a guarantee.

A soft inquiry provides an overview of your credit history but doesn’t hurt your credit score because it’s not part of a formal application for new credit.

Prequalification is not the same as pre-approval, although the two terms are sometimes used interchangeably. To pre-approve you for a mortgage, a lender will request more information and documentation and also run a hard inquiry on your credit report. A hard inquiry can affect your credit score, although usually only slightly. If you’re approved, the lender will provide you with a pre-approval letter that states it is willing to issue you a mortgage for a specific loan amount. That can reassure home sellers that if they accept your bid you’ll be able to come through with the money.

How Prequalification Works

To become prequalified for a mortgage, follow these steps. 

1. Plan the Right Time to Get Prequalified 

Lenders that provide a prequalification (or preapproval) letter often put an expiration date on it. This could range between 30 and 60 days, so it’s important to wait until you are ready to make an offer of purchase. This gives you the largest window for shopping before the letter expires.

2. Provide the Required Documentation

Lenders may require a variety of information in order to prequalify you for a mortgage. This might include proof of income, employment history, and an accounting of your debts. Documentation they might ask for includes:

• Government-issued I.D.
• W2s or 1099s
• Tax returns
• Bank statements 
• Complete list of all monthly debts
• Social Security number

Even if you don’t need all of that documentation at this stage, you’ll eventually have to round it up if you proceed to apply for a mortgage.

3. Consider Getting a Prequalification Letter From More Than One Lender

You’re not obligated to get a loan from every lender that prequalifies you for a mortgage. Once you’re ready to apply for a mortgage, you can shop the lenders that offered a prequalification letter to compare their loans, such as interest rates, closing costs, etc., to determine which one has the best deal. 

Impact of Prequalification on Credit Scores

As mentioned, getting prequalified for a mortgage typically involves a soft inquiry on your credit report. That has no effect on your credit score. Many times lenders will do soft inquiries on your credit report—such as in deciding whether to send you an unsolicited credit card offer—without your even being aware of it.

Soft vs. Hard Inquiries: Understanding the Difference

While soft inquiries have no impact on your credit score, hard inquiries can have some. The implication of a hard inquiry is that you have applied for credit with that lender. Applying for too much credit can have a negative effect on your credit score, although it isn’t necessarily a major factor. Lenders may take multiple loan or credit card applications to mean that you’re in some sort of financial difficulty or in danger of getting over your head in debt.

Credit scoring models do make allowances, however, if multiple mortgage lenders do hard inquiries on your file within a short time frame, such as 14 days or 45 days, depending on the model. Here the assumption is that you’re shopping around for a single mortgage, not that you plan to take out multiple ones.

Why Prequalification Doesn’t Hurt Your Credit Score

Prequalification for a mortgage loan does not hurt your credit because it’s a simple review of your credit history rather than a review tied to an application for credit. Essentially, lenders use this opportunity to see if you will be a good risk for a loan. 

Benefits of Mortgage Prequalification

There are many benefits to getting prequalified for a mortgage loan. These include:

• You will know how much financing you could expect, which helps you determine your budget for a home. 
• You can act quickly if you find a home you love. 
• In a competitive market, being prequalified could give you an edge over home buyers who are not prequalified. Sellers will be more confident that you can follow through on a purchase offer because you have prequalified for the financing. 
• Being prequalified can fast-track you to loan approval and closing on the home purchase. 

Common Misconceptions About Prequalification and Credit

There are several myths associated with prequalification and credit. 

Myth: Your credit score will take a hit if you get prequalified.

Truth: Your credit score will not be impacted if you get prequalified. 

Myth: You are obligated to get a mortgage loan from the lender who prequalified you. 

Truth: You are free to shop around to find the best loan terms for you. 

Myth: A prequalification for a mortgage is the same as being approved for one. 

Truth: You will still need to formally apply for a mortgage loan and get approved before financing is available. Being prequalified is a good indicator that you are likely to be approved, but the lender might still reject your application based on additional information.

Tips for Protecting Your Credit Score During the Home Buying Process

It’s important to avoid damage to your credit score while seeking a mortgage. There are several ways you can do this. 

Check your credit. Review your credit reports prior to getting prequalified to ensure there are no errors or misinformation that could harm your chances. If you find any, report them to the relevant credit bureau and ask that they be corrected. By law you are entitled to a free credit report at least once a year from each of the three major credit bureaus—Equifax, Experian, and TransUnion. You can obtain all three at the official website, AnnualCreditReport.com.

Avoid taking out new credit. You don’t want to take out any new credit cards or other loans when shopping for a loan. That could lower your credit score and increase your debt-to-income ratio (your total monthly debt payments divided by your total gross monthly income), which lenders look at when they’re deciding on your loan application.

Pay your bills on time. Payment history is the most important factor in determining your credit score, so late or missed payments can damage your score.

Shop for a mortgage within a short time frame. Multiple hard inquiries on your credit report could hurt your credit score if they are spread out over a period of time. However, if multiple mortgage lenders check your credit within a limited time frame, that is considered a single inquiry on your report and won’t hurt your score.

What Are Some Specific Strategies to Avoid Hard Inquiries During the Mortgage Application Process?

Make sure all of the lenders you deal with will run only a soft inquiry for prequalification. In addition, hold off on applying for any new credit cards or loans. 

How Can I Monitor My Credit Score for Unexpected Changes During Home Buying?

Your credit score is not part of your credit report, but you can obtain it from a number of sources. Free credit scores are often available from banks and credit card companies as well as from some reputable websites. Bear in mind that there are a variety of credit scoring models and you probably have multiple scores. The score you obtain may not be identical to the one that lenders obtain, although it is likely to be reasonably close.

How Do Multiple Mortgage Prequalifications Within a Short Period Affect Credit Scores?

If all of the lenders only do a soft inquiry, multiple mortgage prequalifications should have no effect.

The Bottom Line 

Getting prequalified for a mortgage won’t hurt your credit score and has numerous benefits, especially if you’re competing against multiple buyers in a tight housing market.  

Read the original article on Investopedia.