You’re settled in your job, you’ve saved for a down payment and you’re ready to kiss paying rent goodbye. But before you start your search for the perfect pad, you’re told that it would be in your best interest to get a mortgage preapproval.
To start the process of a mortgage preapproval, a lender will thoroughly review your finances. This includes running a credit check, which may impact your credit score. The good news is that the dip is temporary and the benefits of getting a preapproval outweigh the short-term drawbacks.
Preapproval can give you a competitive edge, but how will a mortgage preapproval affect your credit score? Let’s take a look at the relationship between mortgage preapprovals and credit scores.
What Is Mortgage Preapproval?
After a lender (like a bank, credit union or online lender) verifies your finances and determines how much money they’ll lend, they’ll provide a mortgage preapproval letter. A mortgage preapproval letter outlines which loan you qualify for, the estimated amount you can borrow and the interest rate the lender will probably offer.
Because you know how much a lender is willing to let you borrow, you’ll know how much you can afford to pay for a home, and you can start to budget for the entire home buying process. A preapproval also signals to sellers that you’re a serious buyer, and you’ve found a bank that is willing to lend you money. In a hypercompetitive seller’s market, a preapproval might give you an advantage over other buyers.
A mortgage preapproval is an offer – not a final mortgage approval. It’s as far as you can get through a loan application without knowing which house you’re going to buy.
You might also hear talk of mortgage prequalifications when you start looking for a home loan. Sometimes prequalification and preapproval are used interchangeably, but they are not the same. A prequalification is a loan estimate based on what you tell a lender – nothing is verified.
A preapproval is more involved, lengthier, requires additional paperwork and carries more weight with sellers.
Does Mortgage Preapproval Require a Hard Credit Inquiry?
A mortgage preapproval does require a hard credit inquiry.
Hard credit inquiry
Hard credit inquiries also happen when you apply for a loan, a credit card or a rental apartment.
Hard inquiries can affect your credit score because borrowers who apply for new credit may be a greater risk for lenders until they can show that they can handle their new debt. Although, if you are applying for preapprovals with different lenders, multiple inquiries from mortgage lenders done within a short window of each other will not all impact your credit score.
Soft credit inquiry
Think of a soft credit inquiry as the “just checking” credit inquiry. They aren’t used by companies that are planning on starting a financial relationship with you right away, so they won’t affect your credit score.
Soft credit inquiries are used for insurance and employment applications, personal credit checks and reviews by creditors you already have a financial relationship with.
To make sure you meet their minimum standards, a lender might perform a soft inquiry when they first receive your mortgage loan application.
Will Mortgage Preapproval Hurt My Credit Score?
Hurt is a strong word. Yes, a mortgage preapproval can affect your credit score, but the impact is usually minimal. Plus, the benefits far outweigh any short-term impact.
By how much will my credit score be impacted by preapproval?
Your credit score is a three-digit snapshot (from 300 – 850) of your credit history. Credit scoring is influenced by a variety of factors, but one hard credit pull shouldn’t have a significant impact on your score.
While FICO® and VantageScore® keep the credit-scoring models they use to generate credit scores a secret, they do share the weight allotted to the different factors that make up your score: payment history, how much you owe, length of credit history, new credit and credit diversity.
Applying for new credit makes up 10% of your credit score. (Your payment history (35%) and amounts owed (30%) have a far bigger impact on your overall score.)
One new credit inquiry may lower your score by five points. Lots of inquiries from different types of creditors in a short period of time can have a bigger impact. A hard inquiry has an even bigger impact if you don’t have a long payment history, or you have a low credit score.
For example, most conventional lenders prefer a credit score of 620 or higher to qualify for a mortgage. If your current credit score is teetering around 620, losing five points may have more of an impact than if you had a higher credit score.
How long will my credit score be impacted by preapproval?
Hard inquiries stay on your credit report for 2 years. But assuming that you continue to pay your bills and use your credit responsibly, your credit score will go back up much sooner. For most borrowers, after a few months, the impact of a single inquiry is minimal.
If you’re working with different lenders because you’re shopping around for the best mortgage interest rate, you may be wondering what damage multiple preapprovals will do to your credit score. Will each preapproval take an additional five points off your credit score?
Never fear, the rate shopping exception is here! And it’s a useful tool when you’re applying for multiple preapprovals.
Basically, companies like FICO® and VantageScore® can recognize when you’re shopping around for a loan and will score multiple hard inquiries as one hard inquiry (aka deduplication).
Inquiries are bundled into a single inquiry for:
- Mortgages, auto loans and student loans
- The same loan types (conventional or government-backed loans)
- Inquiries made within 14 – 45 days (depending on the credit scoring company)
Let’s say you’re working with three lenders to get preapproved, and they all make a hard credit inquiry within a week. Because the three inquiries are for mortgages, the same loan type and happened within 14 days, they will count as one hard inquiry.
To make the rate shopping exception work for you, do your homework. What documentation does each lender want? Then, get organized. Submitting your paperwork to each lender at the same time will increase your chances that the hard inquiries will be made within the same time frame, minimizing the hit to your credit score.
Should You Get a Preapproval?
The short answer is yes. Why? Because when you’re ready to look for a home, a preapproval:
- Gives you a price range for your home purchase, so you know what you can afford.
- Gets you an inside track with sellers, who are more likely to accept an offer if you can show you’re serious and have a bank ready to lend you money
If you get multiple preapprovals, you can compare lender offers. See what interest rates lenders are offering you. The right rate could potentially save you thousands in interest over the life of your loan.
While it’s true that getting preapproved can ding your credit, for most borrowers, the effects are minimal, and they don’t last long.
If You’re Serious About Buying a Home, Get a Preapproval
Preapproval is the way to go when you’re ready to buy a home. Yes, it can bring your credit score down slightly, but the pain is temporary and the benefits of getting preapproved will almost always outweigh the short-term impact on your credit score.
myFICO®. “How Do Credit Inquiries Affect Your FICO Score?” Retrieved February 2022 from https://www.myfico.com/credit-education/credit-reports/credit-checks-and-inquiries
myFICO®. “How are FICO Scores Calculated?” Retrieved February 2022 from https://www.myfico.com/credit-education/whats-in-your-credit-score
Fannie Mae. “B3-5.1-01, General Requirements for Credit Scores (09/01/2021).” Retrieved February 2022 from https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B3-Underwriting-Borrowers/Chapter-B3-5-Credit-Assessment/Section-B3-5-1-Credit-Scores/1032996841/B3-5-1-01-General-Requirements-for-Credit-Scores-08-05-2020.htm