Does Pre Qualify Affect Credit Score?

Does Pre-Qualifying Affect Your Credit Score

Borrowers must obtain pre-qualified or pre-approved when applying for a mortgage loan and looking for money to purchase a new house. It is the first evaluation a lender does of your financial situation to choose the loan you are most likely to be approved for. The lender will want you to provide your credit report before starting the pre-qualification procedure. Many house buyers then have one basic question: Does becoming pre-qualified affect my credit score?

The short answer is no. Pre-qualification, however, shouldn't affect your scores after you are pre-qualified. Here is a deeper view of pre-qualification and pre-approval as well as how your credit is impacted.

The Pre-Qualification Process

By entering some simple information you may acquire an estimate of the mortgage amount from a lending company via pre-qualification.

You will talk with the loan officer and address certain questions about your income, work, credit responsibilities, financial resources, and planned down payment before moving on to the next phase. By knowing this, the lender may ascertain your debt-to-income ratio and project your purchasing power roughly.

Remember something crucial: although some lenders will not pull your credit at all during pre-qualification, others may do a "soft credit check."

Soft Credit Inquiries

Should the lender choose to get your credit report, they will conduct what is known as a "soft credit check," or "soft credit inquiry." This is not the same as a standard "hard inquiry" when a lender reviews your credit record before sanctioning a new loan or credit card approval.

Soft inquiries vary primarily from others in that they do not affect whatsoever on your credit score. A soft draw on your information by a possible lender indicates that the lender may review your credit records and scores; this does not change your credit rating or score or seem to other possible lenders. Unless you acquire your credit report straight from the agency, these soft checks show nowhere on your credit report.

Hard inquiries, the credit checks that all lenders see for 12 months, might somewhat damage your credit ratings. Reducing the number of hard checks in the rate shopping for a house loan method depends on this. There is no way soft checks before pre-qualification damage your credit score in any kind.

Why Check Credit During Pre-Qualification?

Now the question that may arise is why some lenders check credit reports at all when pre-qualification does not necessarily need a full underwriting process. There are a few reasons lenders may choose to check your credit softly during an initial pre-approval conversation.

This credit will give you a rough idea of what you owe based on your credit profile.
Ensure any liabilities that you report are correctly captured to enable the creation of accurate estimates.
Check if there is any problem or reason that would likely decrease the chances of approval later.

Though not obligatory, softly checking credit can help lenders offer a closer pre-qualification prognosis. Well, as you may have noticed, these are the kinds of soft inquiries that do not affect credit scores in any way.

The Pre-Approval Process

Whereas pre-qualification does not involve the assessment of your finances, pre-approval is an actual credit check. Pre-approval is the approval by a lender of a certain amount of money to be advanced to a borrower under some conditions such as no changes in financial status or appraisal problems with a home.

Before approval, the lender will establish your employment, income, bank statements, debts, and down payment, among other aspects. This enables them to decide on loan suitability relative to automated underwriting standards.

In this process, the lender pulls a hard inquiry on credit reports from Equifax, Experian, and TransUnion. This type of credit check can slightly impact your credit scores – typically by less than five points.

The dip is normally temporary unless you have a short and limited credit history. In that case, new accounts such as new customer accounts can have negative effects on average account age and thus hurt scores worse.

Benefits of Pre-Approval

Pre-approval does require a hard inquiry on your credit which does drop your score a few points, but there are benefits of going through full underwriting early on in the homebuying process.

Before approval, sellers of homes know that you are a serious buyer who has the financial backing to make your bid. When it comes to competitive markets, sellers prefer pre-approved offers to pre-qualified bids. It also puts you in a stronger negotiating position when you are trying to make an offer, particularly in situations where time is of the essence, and having a pre-approval letter in hand can be extremely useful during the offer submission process.

Also, it is efficient to do detailed underwriting before entering into a contract as this will save time when under contract. It can help to close more deals faster knowing that credit and income verifications are not a threat looming on the horizon. However, if you have the documents at your disposal, then underwriting is a walk in the park once you are under the contract.

When pre-qualifying, there is no need to check credit harshly or aggressively when reviewing it.

To summarize the key points.

Pre-qualification is usually a soft pull and does not impact one’s credit score in most circumstances. Some of the lenders may run your reports softly without affecting your score.
Pre-approval checks your eligibility, and it pulls your credit report, which is a hard inquiry. Your score may drop by a few points, but the change should not be permanent and will likely recover soon.

You should only have one lender perform hard inquiries when it matters most, such as during the pre-approval process or the actual mortgage application. Multiple hard checks from several lenders can mean the extra points would be lost.

The majority of the experts suggest rate shopping by spacing out the credit checks to be between 14 to 45 days to secure the best mortgage rates. This means that additional hard inquiries from multiple lenders are considered as just one by scoring models.

Bottom Line

Where pre-qualification and pre-approval may start to blur is when it comes to how exactly they affect your credit scores: the difference is in hard and soft inquiries. Soft inquiries give lenders a glance without any repercussions. One hard check results in actual but relatively small score decreases. What harms your rating is that you avoid hard pulls from too many competing lenders when it is unnecessary. Therefore, while pre-approval does involve a credit check if done softly upfront and with adequate time between application inquiries, it is worth getting before beginning your home search.

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