Does Prequalification Hurt My Credit Score?
Whether you need a loan to purchase a home or car, or you’re in the market for a new credit card, you’ll want to take the time to see if you prequalify. Prequalification provides consumers with a way to find out if they qualify for a loan, as well as an estimate of how much they are eligible to borrow. The good news is the prequalification process won’t affect your credit score.
- What is prequalification?
- 7 things you need to know about prequalification
- 1. How to get prequalified
- 2. When should you seek prequalification?
- 3. Soft credit inquiries vs. hard credit inquiries
- 4. Is prequalifying the same as getting approved?
- 5. Prequalified vs. preapproved
- 6. You don’t have to borrow the entire amount you prequalify for
- 7. What to do if your prequalification application is denied
- Proper planning prevents poor performance
What is prequalification?
A person can request prequalification when considering almost any type of loan or credit card. To receive prequalification, borrowers need to provide a few key pieces of information, such as employment status and current income and debt. This step only takes a few minutes to complete, with the results typically provided immediately after submitting the application. In some cases, you may receive a prequalification letter in the mail. However, most of the time you’ll need to either fill out an online form or speak directly with a representative from the financial institution with which you wish to do business.
Once a consumer receives a prequalification letter, he or she will need to review the document and decide whether they’d like to proceed with applying for the loan.
7 things you need to know about prequalification
Whether you’re interested in applying for a loan or a credit card, it’s helpful to review the following points about prequalification:
1. How to get prequalified
If you receive a prequalification letter in the mail or via email, you don’t need to do anything. This happens when financial institutions request lists from credit bureaus on specific groups of people, such as consumers who fall within a certain credit score range. The bank or credit union then contacts the individuals on the list to let them know they prequalify based on the information they received from the credit bureau.
Borrowers who need a credit card or loan don’t have to wait for a prequalification letter to show up in the mail. Many lenders offer prequalification calculators and applications on their websites. Common information you should be prepared to provide includes:
- Social Security number
- Employment status
- Proof of income
- Estimated down payment if purchasing a home
- Late mortgage payments
- Bankruptcies or foreclosures
2. When should you seek prequalification?
There’s no time like the present to seek prequalification, according to Majour Bey, a licensed mortgage loan officer at 1st 2nd Mortgage Company of N.J. in Cresskill, N.J.
“It’s 100% free and … by talking to a mortgage professional early, they can calm your nerves about things you thought would be a big deal,” Bey said.
Since the prequalification process doesn’t affect credit scores, there isn’t any reason not to try. This is true whether you are interested in a loan or a credit card.
3. Soft credit inquiries vs. hard credit inquiries
There are two types of credit inquiries that financial institutions run to determine whether a person qualifies for a loan. During the prequalification process, a soft credit inquiry is used. This type of inquiry does not affect credit scores, so there is no risk in trying to find out whether you’re likely to get a specific loan or credit card.
“Having your credit report evaluated is a mandatory and necessary part of the mortgage process,” Bey said. “Because of that fact alone, there would be no benefit to the bank or anybody involved in the transaction to punish the prospective buyer for having their credit evaluated by a bank.”
A hard credit inquiry is different and can have a negative impact on credit scores. It is used during the preapproval or approval process so the lender can examine a person’s credit report and determine whether there is anything that would make them more or less of a credit risk.
4. Is prequalifying the same as getting approved?
While a person may prequalify for a loan, that doesn’t mean they will be approved for it. Prequalification is given strictly based on what the person reports. During the approval process, a potential borrower’s application is examined in greater detail. Employment status, income and debt are verified during the approval process. Credit reports are also checked for things like a history of late payments or bankruptcies. If there are any discrepancies, or the lender comes across information they don’t like, a loan can be denied. This is true even if prequalification was previously granted.
5. Prequalified vs. preapproved
Prequalification is more of a tool for consumers to see how much of a loan they can afford. As stated above, prequalification doesn’t guarantee that the loan will be approved. On the other hand, preapprovals for mortgages are “more than a tool to determine how much home you can afford,” Bey said. “A preapproval represents a permission slip to begin shopping…It conveys to the listing agent that if this offer is accepted, it will indeed be able to close.”
6. You don’t have to borrow the entire amount you prequalify for
Borrowers aren’t obligated to borrow the full amount they prequalify for. It’s important to look at your overall budget and determine how much debt you are comfortable taking on. Additionally, you don’t have to stick with the first lender that prequalifies you. In fact, it is beneficial to shop around and compare loan and credit card offers before selecting the one you want to apply for. That way, you get the best rate and terms available and avoid paying more than you must in the long run.
7. What to do if your prequalification application is denied
There are some steps you can take to improve your situation if your prequalification application is denied. Equifax recommends obtaining a copy of your credit report and reviewing it for errors and areas where you can improve. Perhaps you need to start making extra payments to reduce your debt, or find a cosigner for a small loan or retail card to develop your credit history. You’ll also want to ask the lender the reason for the denial. If the lender requires two years of employment history, for example, and you only have a year and a half, you’ll know to wait six more months before applying again.
Proper planning prevents poor performance
When used properly, prequalification is a helpful asset that can be used to reach your financial goals. Not only does a prequalification letter give you the information you need to decide whether you’d like to apply for a loan or credit card, but it can also be submitted with a real estate offer to show buyers you’re more likely to get the necessary funding to close on the property. Obtaining prequalification is usually quick and painless, and most importantly, it won’t affect your credit score.
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