As a preliminary step to the mortgage process, you may obtain a prequalification from a lender. In fact, it’s a good idea to do so just so you know that you have a chance to qualify for a loan program. While the prequalification isn’t binding in any way, it can give you an idea of where you stand.
During the prequalification process, you tell the loan officer the amount of your monthly income, the amount of your monthly debts, the credit score you think you have, and the amount of liquid assets you have on hand. The loan officer may also ask a few questions about your employment, housing history, and credit history. With this information in hand, the lender will provide you with a prequalification, assuming you fit the mold for their programs.
During this time, the loan officer doesn’t pull your credit and your credit score isn’t affected in any way.
An Estimate of What you Can Afford
Basically, the prequalification is an estimate of the loan you could ‘probably’ get. Because the lender doesn’t ask for official documentation and they don’t pull your credit report, they don’t base the decision on anything official. Instead, they base the prequalification on the information you provide. If you decide to move forward with the lender, it’s up to you to provide the documentation necessary to prove the information you provided.
The Difference in the Preapproval
If you decide to move forward with a lender, you may want to get a preapproval before you shop for a home. The preapproval lets sellers and/or realtors know that you qualify to receive the loan necessary to buy the home.
The preapproval takes the prequalification one step further. Rather than telling the lender your income, debts, and asset amounts, you prove it by providing your paystubs, W-2s, asset statements, and a copy of your credit report. The underwriter will evaluate these documents and determine if you qualify for the home.
If you do qualify, the lender will write a preapproval better that will state the loan amount you can receive. It will also state the conditions that you must meet in order to close on the loan. Typically, the conditions have to do with the property itself, but some may have to do with your financial situation too.
How a Preapproval Affects Your Credit Score
A preapproval can affect your credit score slightly because the lender will pull your credit. Typically, any inquiry on your credit report costs you five points on your credit score. While five points isn’t much, it can push you over the edge if your credit score was close to the minimum required credit score for a given program.
If you decide you want to shop around for the best rate, you may secure a preapproval from several lenders. While this is recommended, you may worry what it will do to your credit report. While it’s true that an inquiry costs you five points on your credit score, if you secure preapprovals from different lenders, each one will pull your credit report. If you do this within a short time (2-3 weeks), you will only be hit with one inquiry because the credit bureaus recognize the need to shop around for the right interest rate.
Mortgage prequalification doesn’t affect your credit score because lenders don’t pull your credit for this step. If you take the process any further with any lender, though, it will affect your credit score, which is why you need to be swift in your actions and make your decision within a short time so that the credit bureaus only hit you for one inquiry.