Wondering what happens to your credit score when you go for mortgage prequalification and preapproval? We discuss how your credit score is impacted.
It is always good to know the rules before starting the game. That includes the game of investing in real estate that meets your preferences and does not exceed your budget.
You would know your preferences for your next home. But the question is, “What is your home-buying budget?” Or, you would want to know, “How much loan amount can the lender finance?”
For that, you have the mortgage prequalification and preapproval. Here, we touch upon the difference between prequalification and preapproval, along with talking about these two processes affect the credit score.
If you are familiar with real estate investment, you would know how complicated it can be to approve your mortgage. When that is done, you might have another obstacle waiting for you, negotiating a favorable deal with the home seller. Prequalification makes things simpler.
This is the process where lenders check things like your income, debt, credit score, employment history, and other financial parameters. Based on your responses, you will get an estimated loan amount that you may apply for.
Remember, the prequalification process is where the lender might not verify the information you provide. That is one of the major reasons why this process takes less time compared to the preapproval process.
Prequalification can be a good way to improve your chances of buying property. It can be an indication to the buyer that you have done your research and are ready to make the investment.
There is something important you need to know. Prequalification is no surety of getting the loan. But it does clear a lot of confusion that you might have about the process of having your loan approved.
This makes it easier to apply for a loan when the time comes.
The pre-approval process usually follows prequalification. If you thought being prequalified was a walk in the park, being preapproved for a mortgage might be lengthier.
Unlike pre-qualification, the lender may not take your word for your financial positions and assets. They might want to review your documents and financial history. Being pre-qualified allows you to get a more accurate estimate of the loan amount from the lender.
In addition to the documents and proofs for your financial activities, lenders may also want to see your credit score and credit history. These two, score and history, answer a lot of questions that lenders would have before approving your loan.
Some of the questions which the credit scores will answer are.
Now is the time to look at the answers your credit report will give.
Did You Know
Credit reports are maintained by credit bureaus and agencies. Three major credit reporting agencies are Equifax, Experian, and TransUnion.
Just like the mortgage preapproval, being prequalified does not give you the surety of getting the loan. But it can help you understand the mortgage qualification requirements.
Sellers usually give priority to prequalified buyers as opposed to those who are pre-approved. That is because they know you have completed the document verification process.
In the simplest terms, a credit score is the three digital value that helps the lender decide whether to approve your loan or not. This score illustrates your ability to manage and repay your debts on time.
Some factors that can change your credit score include.
Before we move toward answering the question, there are two types of inquiries that you might want to know about, soft inquiries and hard inquiries.
This is when a lender or someone else accesses your credit report for non-lending purposes. Self-checking your report is also a soft inquiry.
Since the soft inquiries are not for lending purposes, it does not negatively impact your credit score.
When the lenders review your financial history to approve your loan, it is a hard inquiry. As the purpose of a hard inquiry is to lend a loan, it can temporarily decrease your credit score.
Multiple hard inquiries within a small period may leave a negative impression on the lender. It might indicate that you are consistently seeking a loan and failing to meet the requirements. This perception may lower your chances of having your loan approved.
As we have discussed earlier, mortgage prequalification gives an estimated loan amount that you can achieve with your financials. It is an early stage, where the lenders don’t determine if you are a credit risk or not.
That is why mortgage prequalification is a soft inquiry. Which means your credit score remains unaffected.
Preapproval is where the lender evaluates the credit report for potential credit risks and red flags. So, this qualifies as a hard inquiry. This means you may temporarily see your credit score go down.
But the good news is that this decrease in credit score is likely to be rectified within a few months.
The more preapprovals you go for, the more your credit score will deteriorate. This might make you eligible for a lower loan amount, making you ineligible.
Being prequalified and preapproved can help you strike the perfect real estate deal. It is fine if you are going for just the mortgage prequalification, as that will not negatively impact your credit score.
But we suggest going for prequalification and preapproval as well. That can strengthen your case to buy your desired property.
Speaking of property, have you decided which home you want to buy? If you have not started the search yet, visit HAR and leave the rest to our award-winning real estate agents.
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