Be Careful When Pre-Qualifying Online - It's convenient to pre-qualify for a home loan online, but you can hurt your credit if you sign up with too many lenders

What Is It?

"Preapproval" means you have met with a loan officer, your credit files have been reviewed and the loan officer believes you can readily qualify for a given loan amount with one or more specific mortgage programs.  Based on this information, the lender will provide you witha preapproval letter, which shows your borrowing power. 

Although not a financial commitment, the preapproval letter can be shown to listing brokers when bidding on a home.  It demonstrates your financial strength and shows that you have the ability to go through with a purchase.  This information is important to owners since they do not want to accept an offer that is likely to fail because financing cannot be obtained.

However, you must keep in mind that too many pre-qualifications could affect your ability to borrow money.  Every time you apply for a credit card or other type of loan, the lender checks your credit history.  These checks show up as inquiries on your credit report, which is maintained by the three main credit reporting agencies:  Equifax, Experian and Trans Union.

The Elusive FICO Score

To determine your credit worthiness, many lenders rely on their own credit scoring systems or FICO scores, which are numbers tabulated using software by Fair, Isaac & Company Inc. and information in your credit report.  The number of credit inquiries affects your FICO score.

There has been increasing pressure on Fair Isaac from consumer groups and the mortgage industry to release information about how its software works, and Fair Isaac recently released the information its scoring models use in calculating a FICO score.

Pre-Qualification Inquiries

Basically, inquiries are an indicator of credit risk.  According to Fair Isaac, the more inquiries on a borrower's credit file, the more likely it is that the borrower will not be able to pay his or her bills.  The problem that many homebuyers get pre-qualified more than once while shopping for homes, generating multiple inquiries on their credit reports.

These Don't Count

Fortunately, Fair Isaac has a new policy that helps potential homebuyers who rack up credit inquiries while trying to find the best home loan.  According to the policy, Fair Isaac's software will ignore all auto- or mortgage-related inquiries that occur within a 30-day period prior to the date the credit score is tabulated.  For every 14 days prior to this 30-day period, only one inquiry will be counted, no matter how many inquiries were made during a particular two-week-period.

The good news is that inquiries have a relatively small impact on a credit score.  Late credit payments -- particularly recent ones -- and high debt carry more weight.  Nevertheless, there's a possibility that homebuyers who continue to shop for loans over a period of months could ultimately hurt their chances to get a home loan, so it's probably best not to get pre-qualified at every mortgage Web site you visit.

Many mortgage brokers and real estate agents are willing to review your credit report with you and point out any potential problems.  If you know or suspect there are lots of inquiries on our credit report, you could ask your lender how this could affect your credit rating or your ability to borrow.

If you've been turned down for credit, you can also obtain a copy of your credit report from the three agencies.  This inquiry is not calculated into your FICO score.

If you would like an expert to review your credit report with you and point out any potential probelms, contact me today for a referral to a top lender!