One of the first steps in home-buying is to determine how much financing you can get to help with the purchase price. And a mortgage prequalification is an excellent first step in that direction. A basic estimate of a loan amount, it’s not as concrete an offer as the one in a mortgage preapproval. But it can help give you a sense of the figure you’d qualify for.

Obviously, that’s a good thing. But there are other factors to consider – like the potential impact on your credit score. Here’s a closer look into prequalification, whether it affects your credit score, and other pros and cons.

How mortgage prequalification works

A mortgage prequalification is an estimate of how much a borrower can be approved for, based on their income and their obligations. Think of it as the first step in getting a sense of how much home you can afford — and, more specifically, how much you can finance, vs pulling funds out of your own pocket (aka a down payment).

The prequalification process is simpler than the preapproval process, and can typically be done through a phone call or online form that provides some basic financial information to a lender: your income, your debts and your assets.

Because a prequalification simply indicates what you might be able to borrow and doesn’t require official verification, it doesn’t expire. As long as your credit and finances stay about the same (and interest rates stay relatively in the same range), the prequalification should still hold as a general idea of how big a loan you could get.

Does prequalification hurt your credit score?

To prequalify, you provide the lender with some financial information – but they don’t just take your word for it; they usually do a quick credit check on you to see your credit score (a key factor in the interest rate they’ll offer you). So does that peek affect your score?

No. “Mortgage prequalification does not impact your credit score like a mortgage preapproval,” says Troy Robillard, a Realtor with Premiere Plus Realty in Fort Myers, Florida. “This is because the lender is not actually making a loan commitment when they prequalify you. They are simply giving you an estimate of how much money you can borrow.”

Technically, the lender’s quick credit check is a “soft pull” of your credit history. Such soft inquiries don’t show up on your credit report, and so won’t affect your credit score. On the lender’s end, they’re seeing a snapshot of your credit history.

It’s like an overview of your credit and financial accounts, in contrast to the more detailed account data they’d see with a hard pull, a  formal, more detailed inquiry that the borrower has to give permission for. Lenders conduct hard pulls when they’re considering you for mortgage preapproval, a more thorough assessment of your credit history. A hard pull does show up on your credit report, and it can impact your credit score.

How much so? “In my experience, having your credit run all over town can lower your score 5-10 points, but one pull has little to no impact on score,” says Steve Hill of SBC Lending.

Tips to improve your credit before getting a mortgage

Before going through the process of obtaining a mortgage, it’s ideal you order your credit reports and see what your prospective lenders will see. And if your credit score is a little low, these are strategies to employ that can help you improve your credit:

  • Build a stable payment history with your lenders: Since your payment history comprises 35 percent of your credit score, on-time payments are the most effective way to increase your score.
  • Lower your credit utilization: You want to keep your balance low relative to your credit line. If you have a credit card with a $2,000 limit, you don’t want to exceed 30 percent usage ($600). Doing this shows lenders you can use your credit line responsibly.
  • Have a good credit mix: Mortgage lenders want to see you can balance revolving credit lines (credit cards) while also making timely payments on installment accounts (car, student, personal loans).
  • Report inaccurate information: If you find incorrect information on one of your credit reports, contact the credit bureau and follow its tips to dispute the item.

Ultimately, you want your credit score to be above 700, as it grants you access to lower interest rates. Thus, reducing the total mortgage costs and making you a better candidate for approval.

Benefits of mortgage prequalification

Get a better understanding of your budget

“A prequalification serves as a useful tool for buyers by estimating their borrowing capacity, states David A. Krebs, a licensed mortgage broker with Dak Mortgage in Miami, Florida. You’ll avoid sticker shock by going through this process early, especially if you’re buying your first home by understanding closing costs and how much of a down payment you’ll need.

Be more attractive to sellers

A prequalification can put you in a “more competitive position in the bidding process,” adds Robillard. Some realtors and sellers might request a prequalification letter before they’ll let you see the property, especially in more in-demand markets, which nowadays, is practically everywhere.

“Yes, you will receive a prequalification letter, similar to a preapproval letter,” states Krebs. “Please note that it may not carry the same weight [with home sellers] since it is based on limited information” — from the soft pull credit check. (Remember, soft pulls give them more of a summary of your credit, whereas hard pulls give the lender a more complete view of your finances)

Learn more about your loan options

Although prequalification is not as formal a process as preapproval, it gives a borrower the opportunity to provide some information to a lender on income, assets and liabilities, Cregger says.

Now that the lender has this information, they might inform you about the different types of mortgages that’d fit your situation, and potentially any first-time homebuyer programs or assistance you qualify for.

Plus, applying for and getting prequalified helps you take stock of your finances. “Perhaps you are able to purchase with less of a down payment than you assumed or perhaps your credit is in better shape than you thought,” Garcia says. “Understanding your options helps you make better decisions when it comes to selecting a home.”

How to get prequalified for a mortgage

Getting prequalified for a mortgage is a relatively easy process. Once you have a mortgage lender in mind, you can typically request a prequalification online or by phone. Many lenders offer a simple online application. “However, it has certain limitations, as it is not a guarantee and does not take into account all factors like a preapproval does,” says Krebs.

Be prepared to share details on your income, debts and assets — but don’t worry about providing documentation to prove this information. Once you complete the prequalification form (and if you’re deemed eligible), you can expect to be prequalified within a few hours, or up to one business day. Nowadays, some online lenders do it in even less time. Those teasers on sites (“find out what you qualify for!” In minutes!”) are usually referring to prequalification.

Next steps

After you’ve prequalified, you can start shopping around for homes — or at least, know what category on the real estate websites to look at. You can even tour some properties, prequalification letter in hand — though, as Krebs notes, its value is somewhat limited. There’s no downside to prequalification, as long as you understand it’s really a rough estimate, not a binding offer in any way.

Think of it as the initial step on the road to getting your mortgage. The next step? Going for preapproval — a more committed agreement from a lender to loan you a certain amount. Then you can start making serious bids on that dream home.