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Mortgage Prequalification: Do They Damage your Credit?

September 30, 2019 By JMcHood

Getting prequalified before shopping for a home is smart. It’s the first step in getting a loan approval. There’s a big difference between prequalification and preapproval, but everyone has to start somewhere.

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It all sounds like it could damage your credit, though. After all, lenders mark your credit report with an inquiry every time you apply for new credit, right? The prequalification works a little different, though.

Keep reading as we dive into the truth below.

What is a Prequalification?

First, let’s start with the truth about a prequalification. While it’s a good idea to know where you stand, meaning how much a lender may give you – it’s not a solid approval. A prequalification is like an estimate of what a lender will provide.

Lenders base the prequalification on the factors that you state – but you don’t have to provide the proof. For example, you may say your income is $75,000 per year, but the lender won’t require paystubs, W-2s, and tax returns just yet. They take your word for it and prequalify you based on the information provided. You don’t have to provide any concrete evidence of your ability to afford the loan just yet.

What About Your Credit Score?

Lenders do pull your credit report when running a prequalification. It’s a ‘soft pull’, though. In other words, there isn’t a specific application tied to the pull. If the lender prequalifies you for a loan, you still have to get preapproved for it. This is when the lender asks for proof of all factors, such as income, assets, and employment history.

Unlike a hard inquiry, which shows up when there’s a specific application tied to the pull, no one sees the soft inquiry. If you pull your own credit, you’ll see it, but other than that, no new lenders see the soft inquiry.

Do Soft Inquiries Hurt Your Credit Score?

Soft inquiries are unlike hard inquiries. They don’t hurt your credit score. In other words, your credit won’t change because you get prequalified for a loan. If you apply for credit and want a preapproval, though, lenders pull a hard inquiry. This could lower your credit score as much as five points per inquiry.

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Why are Inquiries Bad?

Lenders look at inquiries to determine your risk of default. Borrowers that have many inquiries in a short period could be in financial trouble. If you are desperately trying to find a new loan, you may be in financial trouble. Lenders don’t want to be a part of that so they may decline your application if you have too many inquiries.

Preserving Your Credit Score

Once you get prequalified for a loan, at some point you’ll need a preapproval. Prequalification is good for borrowers that aren’t sure how much loan a lender will give them, but who aren’t quite ready to shop for a home.

Preapprovals are for borrowers that have a rough idea of what they can afford and are ready to shop for a home. Most realtors and even sellers won’t show you a home until you have a preapproval letter. But since the preapproval can hurt your credit score, what should you do?

Start with the prequalification. Know beyond a reasonable doubt how much you can afford. Then apply for a mortgage with at least three lenders, but do it in a short time span. Try to get it done within a few weeks. The credit bureaus treat inquiries from the same type of lender within a few weeks as one inquiry. They know the importance of rate shopping. Your credit score may only drop a few points rather than a few points per inquiry.

Before you get prequalified for a mortgage, get your ducks in a row. Know what you need/want and find out if it’s affordable according to your chosen lender. Once you know what lenders will approve, move onto the preapproval. Only do this when you are ready to move forward and get quotes from several lenders, though.

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Filed Under: USDA Loan Process

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