Rates & Affordability

How Can I Get Prequalified for a Mortgage Loan?

Through April 20, 2022, Experian, TransUnion and Equifax will offer all U.S. consumers free weekly credit reports through AnnualCreditReport.com to help you protect your financial health during the sudden and unprecedented hardship caused by COVID-19.

Buying a house is a significant step in life, especially if it's your first time. Before you even start looking at houses, though, it's important to get prequalified for a mortgage loan so you understand what your options are.

Getting prequalified for a mortgage helps you determine what your opportunities are for financing—and even how much house you can afford. Here's what to know about getting prequalified for a mortgage.

Differences Between Mortgage Prequalification and Preapproval

Prequalification and preapproval are essentially the same concept: They're processes lenders use to determine whether a potential borrower can afford to take out a loan or credit card. With some loan types, these terms are used interchangeably. When you're applying for a mortgage loan, however, there are some distinctions between the two.

For starters, prequalification includes a simple check of your finances and credit history to give you an estimate of how much you can borrow if you qualify for the loan—there is no guarantee based on a prequalification alone. For many, it's the first step they'll take when they reach out to a mortgage lender or broker.

Preapproval, on the other hand, gives you a more accurate picture of whether you're eligible for a mortgage loan, as well as what interest rate and terms you can expect. You'll submit an official mortgage loan application, and the lender will provide you with a preapproval letter, which is good to use when making an offer on a house for up to 90 days from the date the letter is issued.

Keep in mind, though, that an approval letter is an offer from the lender, not a commitment to finance. You'll need to undergo another check of your credit history and finances at closing to solidify your financing terms.

How to Get Prequalified

You'll work directly with a mortgage lender or broker to go through the prequalification process. Depending on the financial institution, you may be able to get prequalified online, over the phone or in person.

While each lender can vary in terms of the documentation they require, you can generally expect to provide:

  • Income information
  • Personal information (so the lender can perform a credit check)
  • Basic bank account information
  • How much you want to borrow
  • How much you plan to put down

At this stage, you may not be required to provide tax information, pay stubs or bank statements, which means the lender is basing its decision on incomplete information. As a result, a prequalification won't guarantee approval.

It's also important to note that the requirements for prequalification can vary based on the situation. Take this time to ask questions about the different loan types, interest rates, repayment terms and other details that can help you make a more informed decision.

How Does a Mortgage Prequalification Affect Your Credit?

As with other loan types, getting prequalified for a mortgage won't hurt your credit score. That's because the lender will typically run just a soft credit inquiry, which will show up on your credit report but won't impact your credit score.

If you decide to move forward to get preapproved, though, expect a hard credit check, which can impact your credit score negatively, if only by a little.

Before you start this process, it's crucial to speak with your mortgage lender or broker to make sure you understand what you're agreeing to with prequalification. The last thing you want is a surprise hard inquiry when you thought your credit score was safe.

How to Improve Your Chances of Getting a Mortgage

Mortgage lenders tend to be pickier with borrowers than some other types of lenders, so it can be discouraging if you're not qualified for a loan or if the terms are unfavorable.

Whether or not you think your credit score is in good shape, follow these steps to get your credit mortgage-ready before you submit an application:

  • Check your credit score and report. Get free access to your FICO® Score through Experian, plus access to your Experian credit report, which is updated every 30 days. You'll also be able to order a free credit report weekly from each of the three national credit bureaus through April 2021 via AnnualCreditReport.com. Normally, it's just once every 12 months for each free report.
  • Pay down existing debt. Reducing your credit card debt helps lower your credit utilization ratio, which is a major factor in determining your FICO® Score. What's more, paying off credit cards or other loans in full means that monthly payment is no longer an obligation. The result is a lower debt-to-income ratio, which helps determine your basic eligibility for a mortgage loan and how much you can borrow if you qualify.
  • Look for ways to increase your income. Another way to lower your debt-to-income ratio is by increasing your income, which is the denominator in that equation. Look for opportunities to take on extra work, and consider asking for a raise or consistent overtime hours. Additionally, you can include income earned from a side business. Just be ready to provide a lot more documentation for self-employment income.
  • Avoid borrowing leading up to and during the mortgage process. Any new debt you take on will impact your ability to get a mortgage loan, as well as the capacity to make your payments. As such, it's critical that you avoid opening any new credit accounts for a handful of months before you start the prequalification process. Also, because mortgage lenders run another credit check shortly before closing, you'll want to avoid borrowing from other sources until you've closed.

Improving your credit score can take time, especially if you've made some credit missteps in the past. But even a slightly lower interest rate could save you thousands or even tens of thousands of dollars on a mortgage. So unless you're forced to make a decision now, take your time and make sure your credit is in good shape before you get prequalified.

Continue to Monitor Your Credit During and After the Mortgage Process

Checking your credit score and reports regularly will give you an accurate picture of where you stand and which areas of your credit profile you need to address. However, it's arguably even more important to check while you're going through the mortgage process because anything negative change to your profile could ruin your chances of getting approved.

Using Experian's free credit monitoring tool, you can view your FICO® Score and Experian credit report and also get real-time updates when changes have been made to your credit report, including new inquiries, new accounts and updated personal information.

Even after you've closed on your new home, avoid the urge to ignore your credit score until you need it again. Continue to check your credit score and report regularly, so you can ensure you get favorable financing the next time you need to borrow.