A credit score is your ticket to acquiring lots of major assets — a car, your first home, investment property…etc. The more timely and properly you pay back your dues, the better of a credit score you’ll have and be able to establish reliability in the eyes of lenders such as banks. But while you’re on your home buying journey, there are a lot of mistakes you can make if you’re not well prepared and informed. Today, we’re answering an important question from the mortgage pre-approval process: “Will getting a pre-approval hurt my credit score?” Some may even be wondering, “Why should it?”. A preapproval is a good thing — last we heard. Why would it negatively impact my credit score? Let’s dive right into the specifics to not keep you wondering any longer.
What is a Mortgage Pre-approval?
A mortgage pre-approval letter is a document issued by a lender that predicts how much you may borrow for a mortgage to purchase a home. A pre-approval is based on information such as your income, credit history, and assets. To be granted a pre-approval, a mortgage broker will assess documentation such as your credit reports, personal bank statements, and personal income tax returns during the process.
Types of Inquiries
In order to understand the mortgage pre-approval credit score impact you will face, it’s important to differentiate between the different types of financial inquiries that you can request.
Soft inquiries — these are just checks to determine what your credit score number is. They have nothing to do with a mortgage or credit line. You can look up your own number out of curiosity, or a potential employer may do so as part of a background check.
Hard inquiries — on the other hand, are inquiries by lenders who examine your financial history to determine whether or not to grant you a mortgage or line of credit and what interest rate to charge you. If you’re shopping for mortgages or lines of credit, it indicates to a lender that you’re considering taking on extra debt. As a result, these kinds of queries might lower your credit score, especially if you apply for a number of mortgages at once.
We’ve now established that the type of inquiry you make is the difference between your credit score being affected.
Mortgage Pre-approval Credit Score Impact
A mortgage pre-approval credit check is a hard inquiry that is submitted when you want to initiate the process of getting pre-approved for a mortgage. It’s necessary to make this inquiry in order for the lender to determine specifically how much financing you can receive a green light for. Each time you submit a hard inquiry, you can expect anywhere from 5 to 10 points to be knocked off your credit score since it indicates you are planning to go hundreds of thousands of dollars into debt. It’s important to keep in mind that homeowners also may, and should, shop around for the best rates which mean several lenders will require an inquiry. If you don’t approach the situation wisely, you can drop credit score points with each hard inquiry.
Things to Consider
I’ve put together a few extra points you should know regarding all of this to ensure you have a positive experience and navigate your way through the complex web a bit easier.
- The points knocked off your credit score in the case of hard inquiries are not permanent. They will be retained anywhere from 12-24 months on average, or up to three years at most.
- Preapprovals are still a good thing — yes! Getting a preapproval can put you steps ahead of the home buying process in terms of paperwork and give you an edge against other buyers. It’s undoubtedly worth the extra effort.
- Clarify the window you have to make multiple hard inquiries that will count as one inquiry and do your rate shopping during that period. That period is typically 45 days.
- Working with a mortgage broker can significantly help to streamline the process and enable access to better rates. That means you’ll be able to determine whether you are eligible for preapproval in the first place and then move forward to the actual process of acquiring your pre-approval while in the 45 day window.
The next time someone asks you, “Do pre-approvals affect credit score?” you’ll know that hard inquiries can temporarily knock points off of your credit score but there are still ways to approach the pre-approval process tactfully to still make it out on top.