There’s one key step you should take to increase your chances of landing your dream home: getting preapproved for a mortgage loan with a lender. Most sellers require a preapproval letter to be included with any purchase offers they receive, and it costs nothing to get preapproved for a mortgage loan.
How Does Mortgage Pre-approval Work?
When you’re shopping for a home, it’s useful and important to know how much real estate you can afford, and a mortgage preapproval helps you determine this. During the preapproval process, you’ll send copies of your important financial documents so that your lender can verify your income and your assets. These usually include the two most recent paycheck stubs, your W-2 forms from the last 2 years, your last 2 months of bank account statements, and a copy of your valid government issued photo ID. You’ll also give your lender permission to check your credit reports and credit score, typically by electronically signing an authorization. Once your lender has this information, it will determine how much of a loan amount you qualify for. Your lender will provide this information to you in a written preapproval letter, and this letter is important when making offers on a property.
First, you’ll know exactly how large of a mortgage you can qualify for. This will prevent you from wasting your time looking at homes you can’t afford. Secondly, sellers consider buyers who have preapproval letters to be more attractive than those who don’t.
Pre-approval and prequalified for a mortgage are different, and don’t get them confused. When you get prequalified, you are only telling lenders what you earn each month, what your credit score is, what debts you have, etc. Lenders then estimate how much of a loan you can get from your information, but they don’t check your credit or verify your income. Sellers typically want a pre-approved buyer.
Does Pre-approval Affect My Credit Score?
Does getting preapproved for a mortgage hurt your three-digit credit score? Slightly, but the dip in your credit score will be temporary, and the advantages of getting preapproved far outweigh the possible small dip in your score.
A mortgage preapproval will have a hard inquiry on your credit report, and although preapproval may affect your credit score, it plays a very important step in the home buying process and is recommended to have. The good news is that this possible small ding on your credit score is only temporary. If you keep paying your monthly bills on time, refrain from opening new credit, and keep your credit card debt low; your score will recover quickly from whatever small drop it may suffer.
You don’t have to worry about shopping around for a mortgage, either. If you apply for a mortgage loan with several lenders in a short period, your score won’t drop every time these lenders check your credit. Because you are searching for just one loan, each of the credit pulls from different lenders will count as just one hard inquiry. So even if you get preapproved with, say, three lenders, your credit score will drop by just a small number of points. Just make sure to apply for all your preapprovals within a few days of each other. That way, each hard inquiry will be counted as a single inquiry for credit-scoring purposes. And don’t let that small credit drop prevent you from getting preapproved. The benefits of getting pre-approved far outweigh the small drop your credit score will take, if any.
Types Of Credit Inquiries
There are two types of credit inquiries when it comes to your credit score: hard and soft. Here are the details on both:
- Hard Inquiries: When you apply for a mortgage, car loan, student loan, credit card, or personal loan, most lenders will check your credit. This is a hard inquiry and will cause your score to drop slightly, but only temporarily.
- Soft Inquiries: A soft inquiry happens when someone checks your credit when you don’t submit a complete application for a new credit card or loan. These inquiries don’t cause your credit score to rise or fall. When you check your own credit, for instance, this is a soft inquiry and doesn’t impact your credit score.
The Bottom Line
The bottom line is that getting pre-approved is the best and most important first step in the home buying process. If you’re ready to buy a home, it makes sense to get preapproved with a mortgage lender today. Sellers will be more receptive to your offers, and having a pre-approval letter means you won’t waste your time looking at homes that are outside your price range.