Does Prequalification for Mortgage Affect Credit Score?

When considering a mortgage, understanding how the process affects your credit score is important. This includes the nuances of credit inquiries, particularly for mortgage prequalification and preapproval. Knowing this helps prospective homebuyers navigate the initial stages.

Understanding Credit Inquiries

Credit inquiries record when your credit report has been accessed. There are two primary types: soft inquiries and hard inquiries, each with a different impact on your credit score. Soft inquiries occur when an individual or company checks your credit report without a specific application for new credit. For instance, checking your own credit score, receiving pre-approved credit card offers, or certain employment background checks typically result in a soft inquiry. These inquiries are generally not visible to lenders and do not affect your credit score.

In contrast, hard inquiries happen when you formally apply for new credit, such as a loan or a new credit card. These inquiries indicate you are actively seeking credit and can temporarily lower your credit score by a few points. Hard inquiries remain on your credit report for up to two years, though their impact on your score usually diminishes after a few months.

Prequalification and Credit Score Effect

Mortgage prequalification serves as an initial, informal assessment of your financial health, providing an estimate of how much you might afford for a home. This process is typically based on self-reported financial information, such as your income, debts, and assets. Lenders use this information to give you a general idea of your borrowing capacity and available loan programs.

Mortgage prequalification typically involves a soft credit inquiry. Because soft inquiries do not affect your credit score, prequalification generally has no impact on it. This allows borrowers to get a preliminary understanding of potential mortgage options. It helps in setting a realistic budget before beginning the home search.

Preapproval and Credit Score Effect

Mortgage preapproval is a more formal and comprehensive evaluation of your financial situation than prequalification. It involves a thorough review of verified financial documents, including proof of income, bank statements, and tax returns. Upon successful review, a lender provides a conditional commitment for a specific loan amount, which is a stronger indication of your borrowing power and is often required when making an offer on a home.

The preapproval process typically involves a hard credit inquiry, which can temporarily lower your credit score by a few points. However, this small and temporary dip is a normal part of applying for significant credit, like a mortgage. To mitigate the impact of multiple inquiries when shopping for rates, credit scoring models incorporate a “rate shopping window.” Multiple hard inquiries for the same loan type, such as a mortgage, within a specific timeframe (typically 14 to 45 days, depending on the scoring model) are generally counted as a single inquiry. This allows consumers to compare offers from various lenders without their credit score being negatively affected by each individual inquiry.