How to get a mortgage pre-approval without screwing up your credit

It’s a tough time to be a homebuyer. Inventory is tight in much of the country and home prices are rising, creating a serious seller’s market. That means that if you’re a buyer, you’ll need every edge possible to stand out against the competition when you make an offer.

One easy way to do that is to have a pre-approval letter that you can attach to your offer to help alleviate any concerns about financing. The pre-approval letter shows that a lender has already thoroughly vetted you and agreed to let you borrow the amount needed to purchase the house.

Many sellers in today’s market won’t even consider an offer that doesn’t come with such a letter, since there’s a chance that you might not get financing and then abandon the deal. Some Realtors also require buyers to have pre-approval before they’ll take them to look at houses.

“These days, when there are multiple bids, the person who comes in the most prepared is the one who is going to win the deal,” says Ray Rodriguez, regional mortgage sales manager at TD Bank in New York. “Not only does the seller know that the buyer is serious, but they know that the bank behind the seller is serious, too.”

Still, the process of getting the pre-approval can be tricky. Since it involves what’s known as a “hard inquiry” on your credit (which can drop your score), you’ll want to be careful about the timing and knowledgeable about the consequences. Follow these steps to do that:

1. Don’t settle for “pre-qualification”

Pre-qualification may help you get a broad sense of whether you’ll qualify for a loan and for how much, but it’s not the same as a pre-approval. In a pre-qualification, you’ll share your income, assets, debt and ballpark credit score (see if you can get it for free from your credit card issuer) with a lender, and they’ll give you a sense of whether you’ll be approved and how much money you’ll be able to borrow.

Because the bank hasn’t verified your financial information or bank statements (although some lenders do pull your credit for pre-qualification), the lender isn’t agreeing to give you the money yet. Instead, you’re just getting a sense of where your budget should realistically be.

“Pre-qualification is simply a conversation with your lender,” says Staci Titsworth, vice president and regional manager for PNC Mortgage in Pittsburgh. “Pre-approval is a formal underwriting, including a credit and income analysis.”

2. Time your pre-approval carefully.

While you want to have your pre-approval ready as soon as you make an offer, be careful not to go through the process too early. Most pre-approval letters have an expiration date (typically around 60 or 90 days). Only once you start seriously looking at houses and think you might make an offer, you should have a pre-approval in hand.

If the letter expires before you’ve found a house you want to make an offer on, you’ll need to re-apply, which could end up damaging your credit with another hard inquiry. So, if you’re still testing the real estate waters, wait until you’re serious about buying until starting the pre-approval process. If you have all your documents in order, it should take less than a week for the pre-approval to go through.

3. Do your homework ahead of time

If you provided accurate information for a pre-qualification, you should be in good shape for the more formalized pre-approval process, but you’ll want to make sure that there aren’t any surprises. The goal is to get approved the first time for the loan that you want, so that you don’t have to apply again later. While one inquiry won’t tank your score, multiple inquiries could have a bigger effect.

Before getting your pre-approval, double check your credit score and pull your credit reports (you’re entitled to a free one from each of the Big 3 credit bureaus every year from to make sure that there aren’t any errors. Next pull together all the documents the lender might need, such as recent bank statements, tax returns and W-2s.

4. Work with at least three lenders, but do it all at once

Nearly half of consumers fail to shop around for a mortgage, according to the Consumer Financial Protection Bureau, a mistake that could prove costly. Get quotes from at least one large lender, a regional lender or credit union and one of the online banks. You’ll want to compare not only the rates on the loans, but also the fees associated with them and customer service you’ll receive from the lender. Local lenders may charge slightly higher rates, but if you’re a first-time buyer who needs one-on-one attention, it might be worth it.

The key to shopping around without pulling down your credit score is making sure that all the lenders do their inquiries around the same time. FICO, the most popular credit score used by credit lenders, treats multiple mortgage inquiries made within a 45-day period as a single inquiry so that you’re not penalized for shopping around.

5. Keep an eye on your credit through closing

While pre-approval is a strong indicator that you’ll be cleared for the mortgage, it’s not a guarantee. Most pre-approvals are conditional on final paperwork and updated verification at the close. You’ll need to satisfy any outstanding conditions stated in the letter, such as offering an explanation for irregular bank deposits.

In addition, avoid making any money moves that could change your credit profile. This is not the time to open a new line of credit or be late on debt payments.

“You just want to maintain the status quo or improve it,” says Sarah Valentini, co-founder of Radius Financial. “There should be no changes to your spending patterns in dramatic ways.”

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