Choosing the right mortgage can be as tricky as finding the right home. You can shop around for the lowest closing costs and the best rate if you are willing to share your personal information with multiple lenders. Mortgage pre-qualification has no impact on your credit score, regardless of the number of lenders you contact. However, many people confuse pre-qualification with the pre-approval process, which can hurt your credit score.
When you pre-qualify for a loan, the lender gives you a rundown of your options based on the information you provide. You tell the lender how much you want to borrow, how much you earn and how much cash you have in the bank to cover closing costs. You don't have to show the lender your pay stubs or bank statements, and most importantly, you don't give the lender authorization to check your credit score. The lender determines if you earn enough money to cover the loan amount and estimates your credit score. The pre-qualification process is designed to weed out unqualified buyers. Without checking your credit, a lender can quickly calculate whether you have the financial means to buy your dream home.
You can't normally make an offer on a home on the basis of a pre-qualification letter. If you want to move forward, you have to ask your lender to pre-approve you for the loan. At this point, the lender checks your credit report, typically from the three major credit bureaus: Equifax, Experian and TransUnion. You also have to give your lender documents such as your tax returns and bank statements to prove you have the money to pay the loan. As with pre-qualification, you can get pre-approval from multiple lenders.
Credit bureaus call credit inquiries "hard hits." This simply means your credit was pulled for a business reason rather than because you were curious about your score. Hard hits cause your score to drop although typically only by a few points. If you apply for a mortgage with several lenders within the space of a few weeks, the credit bureaus report the inquiries as one hard hit. Your score doesn't suffer if you submit several mortgage applications within this time frame, although it does drop further if you also apply for a different type of credit product such as an automobile loan. If you spread your mortgage applications out over the course of a few months, each application could count as a hard hit and have a negative impact on your score.
From a lender's point of view, a house represents better collateral than a car or boat because vehicles eventually quit working and houses can last for decades. It is normally easier to qualify for a mortgage with a low credit score than it is to qualify for an automobile loan or credit card. If you have a high credit score, a few hard hits are unlikely to derail your dreams of home ownership. If your credit score falls at the lower end of the spectrum, try to submit your mortgage applications within a very short space of time to ensure you only get one hard hit on your credit report.
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