Does a Pre-qualification Affect Your Credit?

Tight mortgage lending guidelines can make qualifying for a loan challenging. Lenders take factors such as your employment record, your income and your credit into consideration. In your mind, you meet the guidelines for a home or auto loan, but a lender may feel otherwise. This is why prequalifications are essential to the mortgage and car loan process. But before submitting a prequalification application, you need to understand how the process works and how prequalifications affect your credit.

What Is a Prequalification?

Prequalification is the first stage of the home and car buying process. You can visit a lender's website to find a prequalification application. This application takes your basic information, such as your name, address, telephone number, Social Security number and income. The application will also ask the amount of your outstanding debt and assets. A mortgage or auto loan lender evaluates this information, and based on the review, decides whether you're likely to be approved for a loan. Understand, however, that lenders do not verify information during the prequalification stage. Thus, a prequalification is not a loan commitment.

Does a Prequalification Affect Credit?

A prequalification may or may not affect your credit. It all depends on whether a lender checks credit reports during this stage and how often you apply. Lenders vary, and some base prequalifications solely on the information provided in the initial application and do not conduct credit checks. But if a lender does run your credit, the prequalification will appear as an inquiry on your credit report. There is a connection between credit inquiries and risk. Borrowers who open several accounts within a short period of time may have difficulty paying their bills. Plus, excessive inquiries can indicate financial trouble and a desperate need for credit. Because inquiries impact credit scores, prequalifying with several lenders may lower your credit score and ultimately affect an approval.

How to Avoid Credit Damage

You can avoid credit damage if a lender checks your credit during the prequalification stage. Rate shopping is common during the loan process, and it's not unusual for buyers to prequalify with multiple lenders. As long as certain conditions apply, credit scoring systems will not penalize you for prequalifying with multiple lenders. To avoid credit damage from multiple inquiries, complete all your prequalification applications within a short span of time, preferably within 14 days or two weeks. This is important because when you submit multiple applications within a 14-day span, they count as just one inquiry. Additionally, credit scoring systems ignore loan inquiries made within the 30 days prior to their recalculations, so that the inquiries don't hurt your new FICO score.

Considerations

Some home and auto buyers mistakenly confuse a prequalification with a preapproval. The processes are very different and the terms aren't interchangeable. While a prequalification starts the loan process, the majority of home and auto loan lenders do not verify your credit and income during this process. As previously mentioned, some lenders check credit reports during the prequalification period, but these loan officers do not verify financial information and assets. Verification of information takes place during the preapproval stage. The lender will request your tax returns, pay stubs and bank statements. If the mortgage or auto lender did not run your credit for the prequalification, the company will run your credit for the preapproval. A preapproval letter indicates that you meet the requirements for a home or auto loan.

About the Author

Valencia Higuera is a freelance writer from Chesapeake, Virginia. She has contributed content to print publications and online publications such as Sidestep.com, AOL Travel, Work.com and ABC Loan Guide. Higuera primarily works as a personal finance, travel and medical writer. She holds a Bachelor of Arts degree in English/journalism from Old Dominion University.


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