The first step in searching for a home is to set your budget.  As a buyer who needs a mortgage, the only way to set your home shopping budget is to talk with a lender and get pre-approval letter.  The lender will ask you to provide paperwork that gives the lender a clear picture of your financial status.  In your discussions with a mortgage professional, you might learn that the lender doesn’t want to do a hard credit inquiry yet and instead gives you some suggestions for improving your score before a pre-approval letter can be issued.  Why?  It all has to do with numbers.

The importance of credit scores

When it comes to securing a mortgage, your credit score is an important piece of the puzzle.  The higher the credit score is, the more types of loan programs a buyer can qualify for and the interest rate on a loan could be lower too.  Many actions can impact a credit score.  Paying off a loan, opening a new credit card, missing a payment, purchasing a big ticket item using credit, and other things can cause your score to rise or fall.  This is why it is so important to consult with your mortgage professional before you make any financial changes-even the positive ones.

Credit Inquiries when buying a home

There are two different types of credit inquiries that consumers and lenders can do.  

Soft Credit Inquiries:  Made with or without your consent, soft inquiries produce a credit score for a buyer that does not impact their credit score.  This means that your score won’t go up or down because of the inquiry.  Getting your own score through a credit bureau is often considered a soft inquiry.  If you have concerns about your credit score, please share them with the lender.  The lender can do a soft inquiry to get a general idea of where your score is and give you some guidance as to how to improve it.

Hard Credit Inquiries:  These are the credit score pulls that will affect your score.  These are made when you apply for a loan or new credit card.  You must give permission for a hard inquiry of your credit score to be completed.  Before a lender can issue a pre-qualification letter, a hard inquiry of your credit score must be done.  

Why doesn’t my lender want to do a hard credit inquiry yet?

If your credit score is close to the cutoff point of a given loan (like an FHA or conventional) then the lender may not want to risk lowering your score below the requirement.  Instead the lender can provide you with some suggestions for improving your score.  While this can be disappointing if you were ready to start searching for a home, taking some time to improve your credit will only benefit you in the long run.

Does this mean I have to stick with the same lender?

No.  Credit bureaus know that buyers want to shop around to find the most competitive interest rate.  If you have several hard credit inquiries within forty-five days, they will typically recognize this as rate shopping and will consider the credit inquiries as one pull.

Once I have a pre-approval, do I have to purchase a home quickly?

While you don’t have to make an offer on a home the next day, once you have started the home search process and had hard credit inquiries, it is best to get out there and find your Locust Grove house.  You will have most likely locked in your mortgage interest rates (ask your lender how long the rate lock lasts) and your credit score has been pulled.  Delaying looking for  a home for several months would result in having to do another hard inquiry on your credit score which could lower it.