Does Mortgage Prequalification Hurt Your Credit Score?

Images: Getty Images; Illustration: Bankrate

A mortgage prequalification is an estimate of how much a borrower can be approved for based on their income and their financial obligations. Think of it as the first step in getting a sense of how much home you can afford — and, more specifically, how much you can finance.

The prequalification process is simpler than the preapproval process, and unlike a preapproval, it generates what’s known as a “soft” inquiry with your credit, not a “hard” inquiry. For this reason, a mortgage prequalification will not impact your credit score. Read on to get a clear picture of all the pros and cons of prequalification.

Does prequalification affect your credit score?

“Mortgage prequalification does not impact your credit score like a mortgage preapproval,” says Troy Robillard, a real estate agent with Premiere Plus Realty in Florida. “This is because the lender is not actually making a loan commitment when they prequalify you. They are simply giving you an estimate of how much money you can borrow.”

To prequalify, you must provide the lender with some basic financial information, such as your income level, down payment amount and how much you would like to borrow. The lender uses that information, along with a soft credit check, to give you an idea of what mortgage rate you’re likely to qualify for and what your monthly mortgage payment is likely to be.

Soft credit inquiry vs. hard credit inquiry

Technically, the lender’s quick credit check in a prequalification is a soft pull of your credit history. Such soft inquiries don’t show up on your credit report, so they won’t affect your credit score. On the lender’s end, they see a snapshot of your credit history.

In contrast, a hard pull is a more formal, more detailed inquiry for which the borrower must give permission. Lenders conduct hard pulls when they consider you for mortgage preapproval, which is a more thorough process. A hard pull shows up on your credit report and can cause your credit score to decrease (but not very significantly).

Even multiple hard pulls by mortgage lenders might not impact your credit score that much, provided they’re all done within a relatively short timeframe. Credit bureaus figure you’re shopping around for the same mortgage — as any smart home-hunter should — and won’t ding you for multiple applications done within a 45-day window.

How long are prequalifications good for?

Don’t worry about how long your prequalification will be good for — they don’t expire. When you prequalify with a lender, it will issue you a letter specifying how much the lender is likely willing to let you borrow. As long as your financial situation doesn’t change, the amount you qualify for shouldn’t change either.

How to improve your credit before getting a mortgage

To qualify for a conventional mortgage, you’ll need a credit score of at least 620. However, the bare minimum isn’t going to get you the best deal. The lowest rates for mortgages are typically reserved for borrowers with the highest credit scores — and a lower rate can save you considerable money.

Before applying for a mortgage, it’s ideal to check your credit reports and see what prospective lenders will see. If your credit score is on the low side, use these strategies to improve your credit:

• Build a stable payment history: Since your payment history comprises 35 percent of your credit score, on-time payments are the most effective way to increase your score.
• Lower your credit utilization: You want to keep your balance low relative to your credit line. If you have a credit card with a $2,000 limit, you don’t want to exceed 30 percent usage (about $650). Doing this shows lenders you can use your credit line responsibly.
• Have a good credit mix: Mortgage lenders want to see you can balance revolving credit lines (credit cards) while also making timely payments on installment accounts (car, student or personal loans).
• Report inaccurate information: If you find incorrect information on one of your credit reports, contact the credit bureau and follow its tips to dispute the item.

Should I get prequalified for a mortgage?

Perhaps the biggest question here is: Where are you on your homebuying journey?

For example, getting prequalified can be a valuable step before you’ve actually begun shopping for a home, if you simply want to get a general idea of how much mortgage you might be eligible for. Doing so can help you set a budget for buying a home.

Prequalification can also be a good idea if you’re still learning about the various mortgage options and are curious about what types of mortgages might be available to you.

However, if you’re already house hunting or found a home you want to make an offer on, a mortgage preapproval shows a lender’s commitment to fund your loan better than prequalification would. This can be especially helpful if the home seller has received multiple offers and wants to see that you’re a serious, qualified buyer.

Pros and cons of prequalification

Pros

• Getting a better understanding of your budget: “A prequalification serves as a useful tool for buyers by estimating their borrowing capacity,” says David A. Krebs, a mortgage broker with DAK Mortgage in Miami. Applying for and getting prequalified helps you take stock of your finances — you’ll avoid sticker shock by going through this process early, especially if you’re buying your first home, by understanding closing costs and how much of a down payment you’ll need.
• Learning more about your loan options: Although prequalification is not as formal of a process as preapproval, it gives a borrower the opportunity to get all their ducks in a row to share information about income, assets and liabilities with a lender. Once the lender has this information, it might inform you about the different types of mortgages that fit your situation and potentially any first-time homebuyer programs or assistance you qualify for.
• Becoming more attractive to sellers: A prequalification can put you in a “more competitive position in the bidding process,” says Robillard. Some sellers might request a prequalification letter before they’ll let you see the property, especially in more in-demand markets.

Cons

• Not a guarantee: The purpose of prequalification is to provide a general estimate of how big of a mortgage you might qualify for. However, the lender is not actually making a loan commitment. This could cause challenges later if you do not end up qualifying for as much as you hoped or expected. So take a prequalification with a grain of salt — you’ll still need to prove you’re going to be able to repay the loan.
• Doesn’t hold as much weight as preapproval: Prequalification is nice for a home seller to see, but it does not carry the same weight as preapproval. Taking the extra time to get preapproved can be a better way to show sellers that you’re financially qualified.

How to get prequalified

There’s no real downside to prequalification, as long as you understand that it’s a rough estimate, not a binding offer. Think of it as the initial step on the road to getting your mortgage. It’s a relatively easy process — here’s how to do it.

1. Research lenders: Your first step should be researching and comparing various lenders, including reading online lender reviews and testimonials from previous customers.
2. Compare rates: While doing your research, be sure to compare their interest rates. Shopping around for the most competitive interest rate possible can save you thousands over the life of your loan.
3. Request prequalification: Once you have a particular lender in mind, you can typically request a prequalification online or by phone. Many lenders offer a simple online application.