Does Getting Prequalified for a Mortgage Affect Your Credit?
The first step toward getting a home mortgage consists of getting prequalified for a loan. You provide a lender with personal financial information and the lender either approves or denies your preliminary application on the basis of the information provided. A mortgage prequalification does have a negative impact on your credit score, although in most instances the effects are negligible.
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Inquiries
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When you submit a loan application, you provide your lender with your Social Security number and you agree to allow the lender to check your credit report. The three national credit bureaus, Equifax, Experian and TransUnion, keep track of credit inquiries and all inquiries are classified as either "hard" or "soft." Hard inquiries involve a lender checking your report as a result of you submitting a credit application. Soft inquiries involve you, your employer or a service provider checking your credit report for a reason unconnected to borrowing money. Hard inquiries adversely affect your credit score, while soft inquiries have no impact on your credit score at all.
Credit Score
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Your payment history, the balances on your revolving debt and your average length of credit account history all have an impact on your credit score. New accounts and recent credit inquiries only account for about 10 percent of your credit score. Inquiries and new accounts both cause your score to drop because credit bureaus work on the premise that you apply for credit when you need the cash and people who need cash are higher-risk borrowers than those who have no need to borrow.
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Impact
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Generally, a single credit inquiry causes your credit score to drop by less than five points. Credit bureaus assign credit scores that range from 300 to 850, so a five-point change has a minimal impact for most people. If you get prequalified by several lenders within the space of a few days, the additional credit inquiries do not usually impact your score any more than a single inquiry because credit bureaus do not punish you if you shop for the best rate. However, if you submit applications once a week with different lenders over the course of a few months, you could significantly dent your credit score.
Considerations
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You cannot avoid having your credit score checked because lenders use your credit score, in conjunction with other factors such as your income, to determine your creditworthiness. To qualify for a conventional mortgage, you usually need a credit score of 620 or higher. Scores below 620 are subprime and not many lenders write mortgage loans for subprime borrowers. If you have a credit score close to 620, you could fall into subprime territory as a result of a mortgage prequalification. However, if you have a low score, you probably have unpaid or delinquent debts and you can take steps to undo the damage of the credit check by settling some of your past due accounts.
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