Does mortgage prequalification affect your credit score?

Unless you have a heap of cash on hand, before you start house hunting, you’ll want to figure out how much financing you can get to help with the purchase price. And a mortgage prequalification is an excellent first step in that direction.

It gives you a basic estimate of a loan amount a lender might extend you. It’s not as concrete as a mortgage preapproval, but it can help give you a sense of what you’d qualify for. But does prequalification affect your credit score? What are the pros and cons of prequalification? Here’s a closer look.

What is mortgage prequalification and how does it work?

A mortgage prequalification is an estimate of how much a borrower can be approved for based on their income and their 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 primary benefit of being prequalified for a mortgage is that this home loan estimate helps you budget for your home’s purchase price and your down payment.

The prequalification process is simpler than the preapproval process. You can typically complete it with a lender through a phone call or online form that asks for some basic financial information — usually, your income, debts and assets.

You don’t have to worry about how long prequalifications are good for because they don’t expire. That’s because a prequalification indicates what you might be able to borrow and doesn’t require official verification. As long as your credit and finances stay about the same (and interest rates stay relatively in the same range), the prequalification should still be a general idea of how big a loan you could get.

Does prequalification affect your credit score?

To prequalify, you provide the lender with some financial information. They don’t just take your word for it, though. They usually do a quick credit check on you to see your credit score (a key factor in the interest rate they’ll offer you). So, does prequalification affect your credit score?

No. “Mortgage prequalification does not impact your credit score like a mortgage preapproval,” says Troy Robillard, a Realtor with Premiere Plus Realty, a company with offices throughout 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.”

Technically, the lender’s quick credit check 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.

It’s like an overview of your credit and financial accounts, in contrast to the more detailed account data they’d see with a hard pull, a formal, more detailed inquiry for which the borrower has to give permission. Lenders conduct hard pulls when they’re considering you for mortgage preapproval, a more thorough process. A hard pull shows up on your credit report and can impact your credit score.

How much so? “In my experience, having your credit run all over town can lower your score 5-10 points, but one pull has little to no impact on score,” says Steve Hill of SBC Lending, a brokerage in Southern California.

How to improve your credit before getting a mortgage

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

• Build a stable payment history with your lenders: 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, 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.

Ultimately, you want your credit score to be above 700, as it grants you access to lower interest rates. This reduces the total mortgage costs and makes you a better candidate for approval.

Should I get prequalified for a mortgage?

Some of the benefits of getting prequalified for a mortgage include:

• 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 licensed mortgage broker with DAK Mortgage in Miami, Florida. 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.
• Becoming more attractive to sellers: A prequalification can put you in a “more competitive position in the bidding process,” says Robillard. Some realtors and sellers might request a prequalification letter before they’ll let you see the property, especially in more in-demand markets. After prequalification, “You will receive a prequalification letter, similar to a preapproval letter,” says Krebs. “Please note that it may not carry the same weight [with home sellers as preapproval] since it is based on limited information.”
• Learning more about your loan options: Although prequalification is not as formal of a process as preapproval, it gives a borrower the opportunity to provide some information to a lender on their income, assets and liabilities. Now that the lender has this information, they might inform you about the different types of mortgages that’d fit your situation and potentially any first-time homebuyer programs or assistance you qualify for.
• Getting organized: Applying for and getting prequalified helps you take stock of your finances. You might learn you can buy while putting less money down than you thought or discover your credit score needs a boost. Taking this first step helps you make more informed decisions as you move toward homeownership.

Next steps: How to get prequalified

Getting prequalified for a mortgage is a relatively easy process. Once you have a mortgage lender in mind, you can typically request a prequalification online or by phone. Many lenders offer a simple online application.

After you’ve prequalified, you can start shopping around for homes — or at least, know what category on the real estate websites to look at. You can even tour some properties, prequalification letter in hand. There’s no downside to prequalification, as long as you understand it’s a rough estimate, not a binding offer.

Think of it as the initial step on the road to getting your mortgage. The next step? Going for preapproval — a more committed agreement from a lender to loan you a certain amount. Then, you can start making serious bids on that dream home.

Additional reporting by Sean Jackson