When you’re shopping for a home, you want to do as much as possible to show sellers you’re serious and make yourself stand out in a crowded field. That’s particularly true when you’re looking to buy in a seller’s market. In a seller’s market, there are more people trying to buy homes than properties available. Show
One way to make yourself stand out is to get a pre-approval from a lender. With a mortgage pre-approval letter in hand, you demonstrate to sellers that you’re ready to buy and likely have the loan to back you up. Before you get a pre-approval, you might wonder about its impact on your credit score and report. However, for the most part, getting pre-approved will only help you. Read on to have your questions about pre-approval answered. What Is a Pre-Approval?A mortgage pre-approval is essentially a stamp of approval from a lender. It’s very similar to the process of applying for a mortgage loan. A lender will review your documents and history during the pre-approval process to determine your interest rate and how much you can comfortably borrow. Mortgage pre-approval is sometimes confused with pre-qualification, but there are distinct differences. A pre-qualification is generally less serious than a pre-approval. It’s like a rough sketch. When pre-qualifying you, a lender might look at your income and ask about your credit history, but they won’t dig very deep. A pre-qualification can be valuable when you’re in the early stages of home buying. For example, pre-qualification can give you some general guidance if you’re about to dip your toes in and aren’t sure how much you can afford to buy or if you’d even be eligible for a mortgage. It’s an estimate regarding what you can afford and whether you’re likely to qualify for a loan. A pre-approval comes after the pre-qualification once you know that you want to buy a home and are ready to jump in with a real estate agent. To get a pre-approval, you need to provide the lender with some documentation and evidence of your financial status. During the pre-approval process, a lender will look at documents that verify your income, such as income tax returns or paystubs. They might also ask you to provide copies of bank statements to show how much money you have available and what you’ve saved for a down payment. Crucially, a pre-approval involves a credit check. The lender will review your credit history during the credit check, looking for concerns such as missing or late payments. They might also look for bankruptcies and other signs that you’ve had trouble with loans in the past. They’ll get your credit score, too. A pre-approval doesn’t always guarantee that you’ll get final approval for a mortgage. There can be circumstances that stand in the way of getting approved, such as an issue with the property’s title or a home appraised at less than the sale price. Changes in your financial situation between the time you get pre-approved and when you’re ready to apply for the actual mortgage can also affect the process. Why Get a Pre-Approval?Although a pre-approval isn’t a 100% guarantee that you’ll get a mortgage, it’s an excellent first step. It makes you look more attractive as a buyer to sellers. When someone is selling a property, they want to work with buyers who will provide the smoothest experience possible. Someone who’s got a mortgage lender behind them and who’s taken the time to go through the pre-approval process is more likely to commit to the home buying process. Getting pre-approved also helps you narrow down your options. For example, a lender might pre-approve you for a $250,000 loan. With that information in hand, you know where you can set your budget. Going through the pre-approval process also allows you to shop around and see what different lenders can offer you. You’ll be more likely to get a mortgage that works for your budget and financial situation if you have a chance to shop around. How to Get Pre-ApprovedOne way to look at the pre-approval process is as a dress rehearsal for an actual mortgage application. You’ll need to give the lender certain documents, and they’ll review your financial information to determine the following:
To start the pre-approval process, your lender will most likely ask you to provide:
Once you’ve given all your details to the lender, they’ll run your credit score and review the information to determine a maximum loan amount and your interest rate. The higher your income and credit score, the more you can borrow and the lower your rate. Whether it’s 15 or 30-years, the length of your mortgage term will also affect your loan amount and interest rate. If you get the pre-approval, the lender will give you a letter detailing how much you can borrow and the interest rate. When you make an offer on a home, you submit a copy of the pre-approval letter to the seller. Usually, a pre-approval locks in the interest rate for a limited period, such as 90 days. That means you should find and buy a house within that period to get the rate. Otherwise, you might have to start the pre-approval process over again. What’s in Your Credit Score?Your credit score plays a significant role during the mortgage approval process. Your score affects the type of mortgage you qualify for and the interest rate you pay. Your score can affect whether you get approved or not. Some mortgage programs, such as FHA loans, are designed to help borrowers who might not have the credit score needed to qualify for a conventional loan. The companies that calculate credit scores use secret formulas to come up with the three-digit numbers. While the companies keep their exact formulas under wraps, they have detailed the factors that contribute to your overall score:
Each factor has a different impact on your score. For example, payment history typically has the most considerable effect, while credit applications and types of accounts have less of an impact. Does Getting a Mortgage Pre-Approval Hurt Your Credit Score?In short, yes, getting pre-approved for a mortgage can affect your credit score. But the impact is likely to be less than you expect and shouldn’t stand in the way of you getting final approval for a mortgage. What Happens to Your Credit Score After a Pre-ApprovalWhen a lender checks your credit for a mortgage pre-approval, they run a hard inquiry. A hard inquiry can cause your score to dip slightly. The impact on your credit will be minimal. The drop in score that comes after a pre-approval won’t cause the lender to change their mind when it comes time to apply for a mortgage. The drop is temporary. If you continue to pay your bills on time and are punctual with your mortgage payments once you receive one, your credit score will soon recover. What Are Different Types of Credit Inquiries?There are two ways of checking credit. A lender might run a soft or hard inquiry, depending on the situation. Each type of credit inquiry has a different impact on your credit score. Hard Credit InquiriesWhen lenders perform the pre-approval process, they run a hard credit inquiry. A hard credit inquiry is like a large flag that tells other lenders you’re in the process of applying for a loan. A hard credit inquiry affects your credit score, as it signals that you’ve recently applied for credit. If you have several new credit applications on your credit report within a short period, such as within a few months, a lender might see that as a red flag or a sign that you’re having financial difficulties. Usually, the more hard inquiries you have in a limited period, the more significant the impact on your score. For that reason, it’s usually recommended that you do not apply for a car loan, credit card or other types of loan while you’re applying for a mortgage. It’s important to understand that although a hard inquiry often causes a score to drop, hard inquiries in and of themselves aren’t necessarily bad things. You need a hard inquiry to get any type of loan. Soft Credit InquiriesA soft credit inquiry doesn’t have an impact on your credit score. A soft inquiry occurs whenever you check your credit report. A lender won’t be able to see that you’ve run a credit check on yourself. If a lender wants to pre-approve you for a credit card, they’ll also run a soft inquiry on your credit. The lender uses the information they get to put together a credit card pre-approval offer to send you. Other examples of a soft inquiry include when a utility company checks your credit before opening a new account or when an employer runs a credit screening before hiring you. Do Multiple Loan Pre-Approvals Affect Your Credit Score?Shopping around for a mortgage is often recommended to people looking to buy a home. But, if getting pre-approved for a mortgage requires a hard inquiry on your credit report, won’t getting several pre-approvals create several hard inquiries, increasing the damage to your credit score? Fortunately, the impact several pre-approvals have on your credit score is minimal. When you get pre-approvals for multiple lenders, the credit bureaus typically lump them together as a single hard inquiry. Bureaus understand it’s common to shop for a mortgage. Borrowers who get pre-approvals from multiple lenders aren’t penalized for trying to get the best offer possible. How to Prep Your Credit for Mortgage Pre-ApprovalIf you’re getting ready to buy a home, you can do a few things to prepare your credit and increase the odds of getting pre-approved:
Do’s and Don’ts After Getting a Mortgage Pre-ApprovalOnce you have the pre-approval, you’re ready to roll and can put in an offer on a home. Remember that getting pre-approved doesn’t mean you’ll necessarily get fully approved for a mortgage. Certain actions between the pre-approval and final approval can affect your credit and interfere with the mortgage process. Here’s what to do and not do when you’re in the home stretch of getting a mortgage. Do: Continue to Pay Off Other DebtsIf you have other debts, keep making payments on them while looking for a home and going through the mortgage process. Any change in your payment history can impact your credit score, causing a lender to reconsider approving you for a mortgage. Don’t: Apply for New CreditWhile credit bureaus group several mortgage pre-approvals together and count them as a single hard inquiry, the bureaus won’t group other loan applications with your mortgage pre-approval. Several other hard inquiries can affect your credit score, such as a credit card application or personal loan application. Applying for new credit while shopping for a home can also raise alarm bells for your mortgage lender. They might wonder why you’re applying for multiple loans while you’re trying to buy a home. To keep your lender calm and increase your odds of approval for a home loan, wait until after closing to apply for other types of credit. Do: Shop for a HomePre-approvals don’t last forever, so it’s a good idea to get out there and start looking for your dream home once you have the pre-approval letter in hand. Usually, your pre-approval will be valid for several months, so don’t panic if you don’t find your home immediately. Contact your lender if you don’t find the right home before the pre-approval expires. Some are willing to extend the offer beyond the initial period without making you go through the entire credit check and application process again. Don’t: Make Other Big PurchasesIf possible, try not to make big purchases between getting pre-approved, putting an offer in on a home and closing. Buying a new car or new furniture can affect your cash reserves, which might make a lender reconsider approving you for a mortgage. Using a credit card to buy furniture will increase the amount of debt used, affecting your credit score. It’s better to wait until you’ve closed on your home to purchase furnishing for it or before making any other large purchases. Do: Keep Your Lender Up-to-Date on Any Life ChangesDepending on how long it takes to find a home and put in an offer, you might experience some life changes between getting pre-approved and closing on your home. Let your lender know whether it’s a change in income, a new family member or getting an inheritance. Changes in your financial status can affect your mortgage eligibility. Don’t: Quit or Change JobsA history of steady employment is very attractive to mortgage lenders, as it suggests that you’ll continue to have the means to pay your mortgage for years to come. While your job status might be out of your control in some cases, if possible, wait until you’ve closed on the home before quitting your current gig or finding a new job. Becoming unemployed before you have final mortgage approval affects the process. The same is true if you change jobs and accept a lower-paying position. Get Pre-Approved With Assurance Financial TodayThe first step to getting a mortgage is getting pre-approved. Our virtual mortgage assistant, Abby, can guide you through the pre-approval process online. Apply with Abby today and get one step closer to the home of your dreams. Linked Sources:
Do pre approvals hurt credit score?Inquiries for pre-approved offers do not affect your credit score unless you follow through and apply for the credit. If you read the fine print on the offer, you'll find it's not really "pre-approved." Anyone who receives an offer still must fill out an application before being granted credit.
Does preA mortgage preapproval can have a hard inquiry on your credit score if you end up applying for the credit. Although a preapproval may affect your credit score, it plays an important step in the home buying process and is recommended to have. The good news is that this ding on your credit score is only temporary.
Is there a downside to getting preIt can affect your credit score
If you get prequalified multiple times over a long period, such as once in January and again in June, your credit score will be impacted. This isn't ideal, since you're looking to apply for a loan with the most favorable rate and terms.
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