Does Mortgage Prequalification Affect Your Credit Score?
Acquiring prequalification helps bring you closer to landing the home you want. A lender checks your financial information and credit, which is a straightforward process that then lets you know the maximum amount you can borrow, the types of mortgages you can have, and interest rates. However, many clients that Equity Mortgage Lending works with often ask us if mortgage prequalification will affect their credit scores.
What Is Mortgage Prequalification?
Each lender has a slightly different process, but you should expect them to ask you about your financial situation, such as your monthly bills, income, and how much you’ve saved for a down payment. Once they understand your finances and credit, the lender then determines the risk you present as someone looking for a mortgage and how much you can pay back. If they prequalify you, they’ll give you a prequalification letter to share with real estate agents and sellers.
Credit Inquiry Types
Many people don’t realize that there are two types of credit inquiries; soft and hard. A soft inquiry doesn’t impact your credit score, but a hard inquiry temporarily impacts your credit score. An example of a soft inquiry is checking your own credit, a creditor looking to raise your credit limit, or an employer running a background check. Examples of hard inquiries include applying for a personal loan, credit card, student loan, mortgage, or car loan.
Does Mortgage Prequalification Affect Credit Score?
A mortgage prequalification shouldn’t affect your credit score as you provide the lender with your financial information and estimated credit score or your lender uses a soft inquiry to find the necessary information. There are some lenders whose preapproval process is similar to an actual mortgage application and will use a hard credit check.
How To Ready Your Credit For Later
If you’re worried about lenders taking a hard credit inquiry when you apply for a mortgage, there are steps you can take to get your credit ready for that moment. Check your credit to see where you stand, and then pay down any credit balances you may have. When going through the home buying process, now is not the type to apply for new accounts. Remember to pay your bills on time and have a credit utilization ratio of 30% or less.
An example of your credit utilization ratio is if you have a $3,000 credit limit on a credit card but have a $500 balance on the card. Then you would have a utilization ratio of 16.67%. Credit utilization doesn’t just take into account the utilization percentage on each of your credit cards and a combination of your credit cards. If you have a ratio of 16.67% on one but 25% on another, then the combined ratio would be about 20.83%.
Applying for a mortgage can be daunting, particularly when you’re not sure how each part of the home-buying process affects you. That’s why the licensed loan officers at Equity Mortgage Lending are here to help you reach your financial goals. Reach out to us by filling out our online form, calling us at 1-800-332-9221, or emailing us.
* Specific loan program availability and requirements may vary. Please get in touch with the mortgage advisor for more information.