And just like you would seek help if you have disputed collections come back, it’s important to utilize the best Illinois credit services from The Phenix Group when you need help with pre-approval.
What Is Mortgage Pre-Approval?
Mortgage pre-approval involves a detailed review of your finances by a loan officer at the lending institution you visit. Depending on the information you provide about your income, credit history, outstanding debt, and whether or not you can make a down payment, a pre-approval determines how large a loan the lender is likely to offer you and the interest rate of that loan.
Mortgage pre-approval should not be confused with pre-qualification and does not guarantee you will receive a loan. However, getting pre-approval shows that you have undergone most of the financial scrutiny required for approval—it’s as close to approval as possible without choosing the specific property you want to buy.
Once you have received a mortgage pre-approval, the loan lender will give you a letter outlining their willingness to issue you a loan and the terms of the loan.
How Mortgage Pre-Approval Affects Your Credit
A mortgage pre-approval isn’t always as great as it seems on paper, as it can negatively affect your credit score. As part of the preapproval process, you must authorize the lender to review your credit report from the national credit bureaus and allow them to obtain credit scores based on the information generated.
This means that once the lender requests those credit checks, something known as a “hard inquiry” appears on your credit report. Hard inquiries are associated with getting into new debt, so they can cause your credit scores to dip. However, this score reduction is typically short-lived, and its long-term impact is not as serious.
How Long Will a Pre-Approval Impact Your Credit Score?
Pre-approvals lead to hard inquiries that can impact your credit score and stay visible on credit reports for up to two years. Because your credit score is one of the most important factors a lender considers, a low credit score can cause issues when it comes to future loans.
However, the impact on your credit score declines as time passes, and the hard inquiry eventually becomes irrelevant. Many other factors can also build up your score and reduce the effect of getting a pre-approval.
How Does Mortgage Pre-Approval Work?
A pre-approval involves you providing verified information to your lender for them to review. Seeking a pre-approval can help determine the amount you are likely to get, which is helpful to homebuyers setting a budget.
Once you apply for pre-approval, a mortgage expert will review your financial documents and determine your loan options. They will give you a detailed package estimate, including closing costs, interest rates, and monthly payments. The pre-approval review includes things like:
- Credit score
- Tax returns
- Bank statements
- Credit history
- Monthly debt payments
- Pay stubs
- Housing payment history
Once you receive a pre-approval, it’s usually good for about ninety days. The mortgage and interest rate you’re given is a reliable estimate for your house hunting, so you can use these estimates to forecast your mortgage payments and determine the maximum value of the property you can afford.
How to Get Your Credit Ready for Mortgage
It’s good practice to review your credit profile before seeking mortgage pre-approval and, if needed, take steps to improve your credit. Here are some tips on how to do that:
- Correct any fraud or inaccuracies hurting your score. Seek credit monitoring to spot and fix any irregularities.
- Don’t apply for new credit, and limit credit card purchases.
- Try to pay off debt, especially high credit card balances.
- Focus on paying your bills on time.
If you plan and boost your score, you have a better chance of getting mortgage pre-approval and you will minimize the impact that pre-approval will have on your scores. Of course, the professionals at The Phenix Group are ready to help guide you through this process and make sure your credit is in tip-top shape!
Curious about what happens if you don’t reaffirm your mortgage? Take a look at our latest article.