Case Study: Making Multiple Pre
Lets say you applied for a pre-approval with your bank.
Over the next few months, you start shopping around for a property but the particular suburb youre looking at is a tightly-held real estate market.
It ends up taking you more than 6 months to find the perfect home in a price range that suits your budget.
Because pre-approvals only last for 3 months, you would have had to reapply for a pre-approval.
During this time, you also signed up for a new mobile phone plan after your old plan expired.
Youve essentially added three enquiries to your credit file over a space of 6 months:
- Your mobile phone contract.
- Two mortgage enquiries.
This could spell the end of your home loan application if you were to apply for your second pre-approval with a different bank.
However, if youre applying with the same bank, this shouldnt be an issue.
Thats because they would already have your details on file and the most youd need to provide is a couple of current payslips and a bank statement showing your savings.
You Can Check Your Own Credit With No Impact On Your Score
When you check your own credit whether you’re getting a or a it’s handled differently by the credit reporting agencies and does not affect your credit score. If you are applying for a mortgage and haven’t already checked your credit report for errors, do so now. You can get a free copy of your credit report at www.annualcreditreport.com. If you find any errors, get them corrected as soon as possible.
What Are The Best Ways To Build Up My Credit Score Before Applying For Pre
Negative information or a black mark will stay on your credit report for five years. It doesnt mean you cant apply for a home loan, but its likely you will pay a higher rate and higher fees. If you dont require credit immediately then its a good idea to improve your credit score before you apply for a home loan conditional or pre-approval.
The introduction of a comprehensive credit reporting system means there is much more you can do to improve your credit score. Under the previous negative credit reporting system, only negative information was recorded on a credit report and consumers would simply have to wait out the five year black mark period. A comprehensive credit reporting system means that both positive and negative information is recorded. Even if you have a black mark on your credit report, if you can take positive steps toward building your credit score in other areas you may be able to improve your overall credit score.
The following steps may help to improve your credit score:
Lower the limits on your credit cards
Consolidate multiple personal loans
Reduce number of credit cards
Do not make multiple loan applications
Focus on making repayments on time
At least pay the minimum loan repayment
Pay off credit cards in full each month
Negotiate a payment plan with your lender before you default on a loan
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Are Mortgage Enquiries That Bad
The short answer is, no.
Compared to credit cards, personal loans or car loans, having one or even two pre-approval enquiries on your credit file within 12 or even 6 months wont affect your too much.
In fact, its not uncommon for investors looking to rapidly grow their property portfolio to make 3 or even 4 home loan enquiries in a couple of months!
In some cases, it may even improve your credit score, particularly if youve never had any enquiries on your credit file before.
Where it can be a problem is if youve applied for a pre-approval with multiple lenders in a short timeframe.
You may well be shopping around to see what deal you can get but most banks wont see it that way.
They it as a shopping pattern where youve been declined by one lender and now youre trying to see who will approve your application. Not a good look!
Whats a better alternative?
A mortgage broker can properly assess your situation, for free, and provide you with up to three home loan recommendations with an indicative interest rate and list of fees.
The best news is that you wont get an enquiry on your credit file so your credit score wont be affected!
Please call us on 1300 889 743 or complete our free assessment form to speak with one of our brokers about your home loan enquiry.
How To Get Preapproved For A Home Loan
Get your free credit score. Know where you stand before reaching out to a lender. A credit score of at least 620 is recommended, and a higher credit score will qualify you for better rates. Generally a credit score of 740 or above will enable most borrowers to qualify for the best mortgage rates.
Check your credit history. Request copies of your credit reports, and dispute any errors. If you find delinquent accounts, work with creditors to resolve the issues before applying.
Calculate your debt-to-income ratio. Your debt-to-income ratio, or DTI, is the percentage of gross monthly income that goes toward debt payments, including credit cards, student loans and car loans. NerdWallets debt-to-income ratio calculator can help you estimate your DTI based on current debts and a prospective mortgage. Lenders prefer borrowers with a DTI of 36% or below, including the mortgage, though it can be higher in some cases.
Contact more than one lender. Comparing offers from multiple lenders can help you compare rates and fees and save you thousands of dollars over a 30-year mortgage. Going through the mortgage preapproval process shouldnt hurt your credit score. FICO, one of the largest U.S. credit scoring companies, recommends confining those applications to a limited time frame, such as 30 days.
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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.
You Dont Have To Borrow The Entire Amount You Prequalify For
Borrowers arent obligated to borrow the full amount they prequalify for. Instead, prequalification allows borrowers to get an idea of the maximum amount they may be able to borrow.
Its important to look at your overall budget and determine how much debt you are comfortable taking on. Additionally, you dont have to stick with the first lender that prequalifies you. In fact, it is beneficial to shop around and compare loan and before selecting the one you want to apply for. That way, you get your best rate and terms available and avoid paying more than you must in the long run.
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The Mortgage Credit Pull Window
The mortgage credit pull window is a grace period where multiple mortgage applications are believed to only count against your credit score as a single hard inquiry. The window is thought to be between 7 and 45 days.
Although the mortgage credit pull window isnt an official rule straight from the credit bureaus, its a reliable guideline you can trust. Typically when a borrower is shopping and we pull their credit, its close to, if not exactly the same as what they saw from other lenders.
How Long Preapproval Lasts
Preapproval doesn’t last forever. Check your expiration date and keep it in mind as you look at homes. Though it varies from lender to lender, preapproval is typically valid for 60 90 days. If you haven’t settled on a house, you can request a renewal by giving your lender your most up-to-date financial and credit information.
The right home is out there.
Find it online at RocketHomes.com.
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Why Checking Your Own Credit Is Smart
While a credit check when you apply for credit can cause your score to dip, checking your own credit has no effect on your score.
Its perfectly safe, and it’s a great way to know ahead of time what a lender will see and whether you are likely to qualify.
About the authors:Bev O’Shea writes about credit for NerdWallet. Her work has appeared in the New York Times, Washington Post, MarketWatch and elsewhere.Read more
Anisha Sekar is a former personal finance writer for NerdWallet. She has worked for Silicon Valley startups and in the public sector. She studied applied mathematics and economics at Brown University.Read more
What Does A Loan Application Have To Do With My Credit Score
Lenders use to assess your creditworthiness: Can they count on you to pay back a loan ?
Doing things that can be considered risky, like carrying a high balance on your credit cards or missing payments, will lower your score. So why would a new application be considered risky?
Its all numbers and probability. Statistically, people with more credit inquiries are more likely to declare bankruptcy, meaning creditors are at risk of losing their money, according to FICO, a widely used credit score. So credit inquiries, particularly lots of credit inquiries at once, can be a red flag.
However, rate shopping for student loans, mortgages and auto financing that can result in multiple inquiries is treated a bit differently.
In those cases, you have a window of time during which you can apply for as many of those loans as you want with the same effect on your scores as applying for one. This is because lenders expect you to compare rates for those loans, and scoring models dont punish you for being financially savvy.
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What Is Mortgage Pre
A mortgage pre-approval is a letter from a lender that estimates how much you can borrow on a home loan. The pre-approval is based on details like your income, credit history, assets, and debts.
During the process, a loan officer will go over pre-approval documents such as your credit reports, recent pay stubs, personal bank statements, and your federal personal income tax returns.
Theyll use this information to determine whether you qualify for the mortgage loan and the amount you can receive.
- Mortgage pre-approval: Requires a more in-depth review of your finances to confirm your creditworthiness and determine the loan amount you qualify for.
- Mortgage prequalification: A lender gives you an interest rate quote based on information you tell them, usually without documentation.
Why Were You Offered A Pre
If you already have an account with a bank, they may pre-approve a credit increase or a new line of credit because they recognize you for being a good customer. By diligently paying off your card every month and staying on top of your current loans, your bank now trusts that you will pay them back if they increase your available credit.
Pro tip: If your issuer notifies you that you are pre-approved, ask them for points in return for raising your credit limit. They may not always say yes, but some issuers do this. Its worth a try.
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Preapproval Vs Prequalification: What’s The Difference
When you start looking for a mortgage, another term you might come across is “prequalification.” Though home loan preapproval and prequalification are often used interchangeably, the process and terminology varies among lenders.
In some cases, prequalification is based on your answers to a few initial questions and a soft credit check . It usually doesn’t include details about loan amount, interest rate or terms. As such, it’s less authoritative than a preapproval — but it’s a good way to get an initial idea of whether you’re in good enough financial shape to qualify for a mortgage.
“A true preapproval will verify assets, income and the ability to repay the loan,” Watters said. “Some lenders will offer a preliminary prequalification letter, but this only shows a borrower qualifying based off of the information they submitted in their application.”
When you’re ready to make an offer on a home, you’ll want to have an official statement from a lender — or, better yet, multiple lenders — that you can get the financing and terms you need to close on the deal. Whichever term your lender uses, make sure you have it before you make an offer.
Getting Prequalified Can Reduce Unpleasant Surprises
When used properly, prequalification is a helpful tool that can reduce your chances of being surprised by a credit card rejection or help you determine the odds of being approved for a loan.
Not only does a prequalification letter give you the information you need to decide whether youd like to proceed with a formal application for a loan or credit card, but it can also be submitted with a real estate offer to show buyers youre more likely to get the necessary funding to close on the property.
Obtaining prequalification is usually quick and painless, and most importantly, it wont affect your credit score.
Need help improving your credit score but not sure where to start? !
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How Do I Minimize Hard Inquiries
If you need a loan, theres probably no way to avoid a hard inquiry. But the score benefit you get from on-time payments will outweigh a short-term point loss from applications.
What you want to avoid is applying and getting turned down. Then you may still need a loan, but you’ll have a lower credit score.
Heres how to make the most of an application:
Be as certain as you possibly can be that you meet the qualifications and will be approved. Some lenders offer pre-qualification, which typically does not involve a hard inquiry and can help you determine whether youre likely to qualify.
Check terms before you apply, and be sure the loan is a good fit for you.
Avoid applying for new credit for at least six months before you plan to make a large purchase that will require a loan a house or car, for example.
What To Do If A Lender Refuses Your Mortgage Application
A lender could refuse you for a mortgage even if youve been preapproved.
Before a lender approves your loan, theyll verify that the property you want meets certain standards. These standards will vary from lender to lender.
Each lender sets their own lending guidelines and policies. A lender may refuse to grant you a mortgage if you have a poor credit history. There may be other reasons. If you dont get a mortgage, ask your lender about other options available to you.
Other options may include:
- approving you for a lower mortgage amount
- charging you a higher interest rate on the mortgage
- requiring that you provide a larger down payment
- requiring that someone co-sign with you on the mortgage
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What Is Mortgage Prequalification
Prequalification is an early step in your homebuying journey. When you prequalify for a home loan, youre getting an estimate of what you might be able to borrow, based on information you provide about your finances, as well as a credit check.
Prequalification is also an opportunity to learn about different mortgage options and work with your lender to identify the right fit for your needs and goals.
The Mortgage Preapproval Letter
When you get preapproved, you usually get a preapproval letter. There are a few reasons the preapproval letter is important. First, real estate agents typically want to see your preapproval letter before they show you houses. This ensures they dont waste time showing you homes outside your budget.
Second, the preapproval letter is something you can share with the homes seller when you make an offer. It shows you wont have problems getting financed for the amount youre offering.
Also Check: What Is A Mortgage Modification Agreement
The Bottom Line: Should You Get A Pre
Now that you know how soft and hard inquiries can affect your credit score, should you apply for a pre-approved mortgage? Ultimately, the payoff is worth it, as you will be investing in your own home.
Think of mortgage pre-approval as lining your ducks in a row. You’re preparing yourself for closing on purchasing your new property within a two-week period, rather than spacing it out within months. During this period, avoid applying for other forms of credit, as they will affect your credit score. A good rule of thumb is to secure a few lenders for pre-approval who are on-board with you.
You Can Shop Around For A Mortgage And It Will Not Hurt Your Credit
Within a 45-day window, multiple credit checks from mortgage lenders are recorded on your credit report as a single inquiry. This is because other creditors realize that you are only going to buy one home. You can shop around and get multiple preapprovals and official Loan Estimates. The impact on your credit is the same no matter how many lenders you consult, as long as the last credit check is within 45 days of the first credit check. Even if a lender needs to check your credit after the 45-day window is over, shopping around is usually still worth it. The impact of an additional inquiry is small, while shopping around for the best deal can save you a lot of money in the long run. Note: the 45-day rule applies only to credit checks from mortgage lenders or brokers’ credit card and other inquiries are processed separately.
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