How To Get Prequalified For A Mortgage
Jump start your home search with prequalification
Prequalification and preapproval are terms you hear during the home buying process. They sound similar but they are not quite the same. Both are a type of proof for real estate agents and home sellers that demonstrate you may qualify for a mortgage to buy a home.
Whats A Hard Credit Inquiry
As we mentioned above, there are two types of credit inquiries: hard inquiries and soft inquiries.
Hard inquiries are typically triggered when you apply for a loan or credit card and the lender checks your credit when making a decision on your application.
While a new card or loan may follow a hard inquiry, a hard inquiry can also lower your credit scores by a few points. A hard inquiry may remain on your credit reports for up to two years, but the damage may be removed even before then.
Hard inquiries have a much smaller impact than most people think, says Randall Yates, founder and CEO of The Lenders Network. He notes that this may be especially true regarding FICO scores, which only consider inquiries from the past 12 months.
Soft inquiries, on the other hand, typically happen when an employer or company checks your credit as part of a background check, or when you check your own credit. A soft inquiry may occur with or without your permission, but it wont affect your credit scores.
As part of the prequalification process, a lender could perform a soft inquiry, which may give it enough information to predict whether youre likely to be approved.
Why Are They Important
If getting preapproved or prequalified doesnt guarantee a loan offer, then why bother?
One big benefit is that a preapproval or prequalification letter can let sellers know youre a serious potential buyer. This can be key in a competitive market.
Other benefits of getting preapproved or prequalified include
- Knowing in advance how much you may get to borrow. If you want to buy a car or a home, getting preapproved or prequalified can let you know if your budget is realistic. If youre applying for a different type of loan, the process can give you an idea of how much could be available to you.
- Seeing any credit issues that need to be addressed. A lender may check your credit as part of prequalification or preapproval, so its a good idea to review your own reports beforehand. If you uncover any errors, you can look into disputing them. If your credit history has some legitimate dings, you can take steps to improve your credit.
If youre denied preapproval or prequalification or if youre preapproved or prequalified for a smaller amount than youd hoped take the opportunity to ask the lender how you can improve your chances of getting the loan you want in the future.
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Why Is My Pre
Pay Off Debts When determining how much you can borrow, a lender will look at your monthly debt payments. If you have an extensive monthly debt burden, your preapproval amount will be lower. But if you can eliminate some of these debts from your books, then a lender may be willing to increase your preapproval amount.
Do I Need A Mortgage Pre
If youre looking to purchase apre-construction condo, your builder will most likely ask that you obtain a mortgage pre-approval as a condition of your purchase agreement. Depending on your agreement, the builder might not ask for a mortgage pre-approval right away, but they may still have the right to ask for one at any time. If youre unable to get pre-approved for a mortgage, then your purchase can be canceled.
Its a good idea to get a mortgage pre-approval during the 10-day cooling period after signing your pre-construction condo purchase agreement. That way you can cancel your purchase without penalties if youre unable to be pre-approved for a mortgage. While your occupancy and closing date might still be far away, a mortgage pre-approval is required by condo builders so that they have some assurance that you will be able to follow through with the purchase of your condo unit. However, themortgage rateoffered in your pre-approval may differ from your actual mortgage rate if the closing date is still years away.
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How To Shop For A Mortgage Without Hurting Your Credit
You can still shop around for the best rate without hurting your credit if you use the right strategy. Here are some times on how to shop for a mortgage without hurting your credit.
The Two Types Of Credit Inquiries
There are two types of credit inquiries into your credit score. They’re known in the business as soft inquiries and hard inquiries. Only a hard inquiry is an indication that a lender is actively considering extending credit to you or has just done so.
When a consumer fills out an application that accompanies a pre-approved offer, the lender will sometimes use the soft inquiry that has already been pulled to make its decision, or it may pull a new report using a hard inquiry.
A soft inquiry is seen only by the consumer. It has no effect on a credit score, and other lenders cannot see them.
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How To Get Preapproved For A Mortgage
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In the world of homebuying, think of a mortgage pre-qualification as a learners permit, while a mortgage preapproval is a license to drive. A pre-qualification letter can get you on the road to homeownership but doesn’t prove you can go the distance. With a preapproval letter, youre in the fast lane. It lets real estate agents and home sellers know you are serious about buying a home.
What Does Loan Approval Mean In Real Estate
After obtaining mortgage pre-approval, you and your real estate agent will begin looking at homes in your local market. When you find the house you like and make an offer, you will provide your mortgage lender with a copy of the purchase agreement. The lender will then conduct a home appraisal to ensure the house is worth the asking price and will begin underwriting your loan, which can typically take about 30 days or more. At this point in the home buying process, the home you’re trying to purchase will be listed as contingent until it closes. If all goes well, you will receive mortgage approval from your lender, meaning you can move forward with buying the home.
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Does Prequalification Affect Your Credit Score
Pre-qualification is not the same as pre-approval. With pre-qualification, the financier does not verify the numbers you provide regarding income, debts, etc. You can receive your response more quickly than with a pre-approval, but it is only an estimate of the amount you may qualify for. With pre-qualification, the financier typically runs only a soft inquiry, which does not impact your credit score.
You can apply for pre-qualification without a second thought about the impact on your credit. Just remember to complete the full pre-approval before you begin searching for a home.
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Why Should I Get Pre
Since being pre-approved wont significantly lower your credit score, many experts say its worth the extra time and effort to secure a letter of pre-approval from a lender. Your letter of pre-approval is your golden ticket into the world of home-buying.
Once youre pre-approved, you can show your letter to sellers to let them know youre serious about buying and not just window shopping. This also lets them know that you have the finances to secure a mortgage if they decide to sell their home to you.
When you are pre-approved you know the budget you have to work with. You will be able to narrow your search to homes in your price range. This will help you save time.
Once you find a home you love, youll be able to close and move in quickly since your lender already has your information on file from the pre-approval.
Being pre-approved is a win-win for everyone involved, and you can shop confidently once you have your letter in hand.
Should You Get Mortgage Pre
If you are serious about buying a home and have strong credit, low debt, high income, and a solid overall financial history, you can most likely skip the pre-qualification step and apply directly for pre-approval.
On the flip side, if you dont have great credit, significant debts, and unstable income, you may want to consider pre-qualification first to see if you will qualify for a loan. Skipping the pre-qualification step could mean a lot of wasted time and money , only to learn that you do not qualify for a mortgage.
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What Is A Pre
A mortgage pre-approval is essentially a stamp of approval from a lender. Its very similar to the process of applying for a mortgage loan. A lender will review your documents and history during the pre-approval process to determine your interest rate and how much you can comfortably borrow.
Mortgage pre-approval is sometimes confused with pre-qualification, but there are distinct differences. A pre-qualification is generally less serious than a pre-approval. Its like a rough sketch. When pre-qualifying you, a lender might look at your income and ask about your credit history, but they wont dig very deep.
A pre-qualification can be valuable when youre in the early stages of home buying. For example, pre-qualification can give you some general guidance if youre about to dip your toes in and arent sure how much you can afford to buy or if youd even be eligible for a mortgage. Its an estimate regarding what you can afford and whether youre likely to qualify for a loan.
A pre-approval comes after the pre-qualification once you know that you want to buy a home and are ready to jump in with a real estate agent. To get a pre-approval, you need to provide the lender with some documentation and evidence of your financial status.
Does A Mortgage Pre
A mortgage pre-approval affects a home buyers credit score. The pre-approval typically requires a hard credit inquiry, which decreases a buyers credit score by five points or less.
A pre-approval is the first big step towards purchasing your first home. It increases your chances of having your offer accepted and provides you with a detailed quote to use for your budgeting.
As an integral step of the home buying timeline, its essential to understand how a pre-approval differs from a pre-qualification assessment and why it requires a hard inquiry instead of a soft inquiry.
Lets dive into these differences so you can make the best decisions when buying your first home. Heres how a mortgage pre-approval can affect a credit score.
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Not All Inquiries Are Alike
Soft inquiries just check to see what your number is. They dont have anything to do with a loan or line of credit. For example, you might look up your own number just out of curiosity, or someone whos considering hiring you might do so as part of a background check. Soft inquiries dont affect your credit score at all. In fact, we recommend checking your credit score now so you can see where you stand and have a chance to correct any errors you may find. You can check your score at www.annualcreditreport.com. Its fast, free, and easy.
- You check your own credit
- One of your current creditors checks your credit
- A company checks your credit to see if you qualify for preapproval offers
- You get a new job and your employer pulls your credit report as part of its screening process
Hard inquiries are different. With these, a lender is checking on your financial history to decide whether to give you a loan or line of credit and what kind of rates to charge you. If youre looking for loans or lines of credit, it tells a lender that youre thinking of taking on more debt, which can affect how much youll be able to pay back on your mortgage. Thats why these kinds of inquiries can subtract from your credit scoreespecially if youre applying for a lot of loans at once.
Hard inquiries:
Does Preapproval Affect My Credit Score
A mortgage preapproval can have a hard inquiry on your credit score if you end up applying for the credit. Although a preapproval may affect your credit score, it plays an important step in the home buying process and is recommended to have.
The good news is that this ding on your credit score is only temporary. If you keep paying your monthly bills on time and keep your credit card debt low, your score will recover quickly from whatever small drop it suffers.
You dont have to worry about shopping around for a mortgage, either. If you apply for a mortgage loan with several lenders in a short period, your score wont drop every time these lenders check your credit. Because you are searching for just one loan, each of the credit pulls from different lenders will count as just one hard inquiry. So even if you get preapproved with, say, three lenders, your credit score will drop by just a small number of points.
Just make sure to apply for all your preapprovals within a few days of each other. That way, each hard inquiry will be counted as a single inquiry for credit-scoring purposes.
And dont let that small credit drop prevent you from getting preapproved. The benefits of getting preapproved, such as knowing how much home you can afford, far outweigh the tiny drop your credit score will take.
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Your Credit Score Remains The Same Even If You Getpre
Experts will advise you to get a pre-approval from several lenders for good reasons: it will not hurt your credit score and you could get the most competitive rate. The best time to get a pre-approval is before you start looking for homes or submitting an offer. Although lenders will pull out your credit history and make a hard inquiry, it will not affect your credit score because youre just shopping for a more beneficial mortgage interest rate. Hard inquiries could hurt your credit only if they are a result of your trying to open multiple credit cards in a short time. Credit scoring company, FICO even recommends homebuyers to get a pre-approval from multiple lenders within 30 days to secure a better rate.
On average, you could save hundreds of dollars in interestif you could compare pre-approvals from at least five mortgage lenders.
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When To Get A Mortgage Preapproval
The best time to get a mortgage preapproval is before you start looking for a home. If you dont, and you find a home you love, itll likely be too late to start the preapproval process if you want a chance to make an offer. As soon as you know youre serious about buying a home that includes getting your finances in home-buying shape you should apply for a preapproval.
If youre following mortgage rates, you can to determine the right time to strike on your mortgage with our daily rate trends.