When you’re in the market for a new home, one of the first steps many potential buyers take is getting pre-approved for a mortgage. Pre-approval gives you a clear idea of your budget and shows sellers you’re a serious buyer. However, many people are concerned about whether getting pre-approved for a home loan affects their credit score. The short answer is yes, it can—but the impact is usually minimal and temporary.
In this article, we’ll explore pre-approval, how it affects your credit, and what you can do to minimize any potential impact on your credit score.
What is Mortgage Pre-Approval?
Before discussing how pre-approval affects your credit, it’s essential to understand what it involves.
A mortgage pre-approval is a process where a lender evaluates your financial situation—including your income, assets, debts, and credit score—to determine how much they are willing to lend you. This is a more in-depth process than pre-qualification, where lenders give you a rough estimate of what you can borrow based on self-reported information. Pre-approval typically involves the following:
- Credit Check: The lender will check your credit report to assess your financial history and creditworthiness.
- Income Verification: To verify your income, you’ll be asked to provide documentation, such as pay stubs, tax returns, and bank statements.
- Debt-to-Income (DTI) Ratio: Lenders use your DTI ratio to see how much of your income goes toward paying existing debts. This helps them determine whether you can afford the mortgage payments.
If everything checks out, the lender will give you a pre-approval letter stating how much you can borrow and at what interest rate. This letter can give you a competitive edge when making an offer on a home.
How Pre-Approval Affects Your Credit Score
The main reason pre-approval can affect your credit score is the hard inquiry (also called a hard pull) that occurs when the lender checks your credit report.
Hard Inquiry vs. Soft Inquiry
Two types of credit inquiries can affect your score differently:
- Soft Inquiry: Soft inquiries, also known as soft pulls, don’t impact your credit score. They occur when you check your credit or when a company checks your credit for marketing purposes, such as for pre-approved credit card offers. Mortgage pre-qualification often involves a soft inquiry that won’t affect your score.
- Hard Inquiry: A hard inquiry happens when a lender reviews your credit report as part of the approval process for a loan or credit card. Depending on your credit history, hard inquiries can temporarily lower your credit score by a few points, usually between 5 and 10 points. Mortgage pre-approvals involve a hard inquiry, which impacts your credit score.
Impact of Multiple Inquiries
If you’re shopping around for a mortgage, you may be concerned about multiple hard inquiries damaging your credit. The good news is that most credit scoring models (including FICO and VantageScore) recognize rate-shopping for loans and treat multiple mortgage inquiries within a short period as a single inquiry. Depending on the credit scoring model used, this shopping window is typically between 14 and 45 days.
This means that if you get pre-approved by several lenders within that window, one hard inquiry should only affect your credit score.
How Much Will Your Score Drop?
For most people, the impact of a single hard inquiry is small—usually between 5 and 10 points. However, suppose you have a shorter credit history or a higher number of recent inquiries. In that case, the effect may be slightly more pronounced.
It’s important to note that hard inquiries only affect your score for 12 months, and they disappear from your credit report entirely after two years. For most borrowers, the small, temporary drop in their credit score from a pre-approval inquiry outweighs the benefits of securing a mortgage.
Minimizing the Impact on Your Credit
Although a pre-approval inquiry is unlikely to have a significant long-term impact on your credit score, there are several steps you can take to minimize its effects and keep your credit in good standing.
Check Your Credit Before Applying
Before applying for pre-approval, it’s a good idea to check your credit report. This is a soft inquiry, so it won’t impact your score. Reviewing your credit report allows you to identify any potential errors or issues that could lower your score and address them before a lender pulls your report.
You can get a free credit report from each of the three major credit bureaus—Equifax, Experian, and TransUnion—once a year through AnnualCreditReport.com. Regularly monitoring your credit is an excellent habit to develop, especially if you plan to apply for a large loan.
Time Your Applications Wisely
As mentioned earlier, credit scoring models treat multiple mortgage inquiries within a short period as a single inquiry. To minimize the impact on your score, complete all pre-approval applications within the 14- to 45-day shopping window.
This allows you to compare different lenders and mortgage offers without fearing multiple hard inquiries damaging your credit.
Avoid Opening New Credit Accounts
While undergoing the mortgage pre-approval process, it’s important to avoid opening any new credit accounts, such as credit cards or car loans. New credit accounts result in additional hard inquiries and increased debt, which could lower your credit score or increase your debt-to-income ratio, potentially affecting your mortgage approval.
Maintain your existing accounts, pay down any outstanding balances, and avoid new debt until after your home purchase is complete to keep your credit stable.
Pay Down Existing Debt
Your debt-to-income ratio is a critical factor in determining your mortgage eligibility. If you have existing credit card balances or other debts, try to pay them down before applying for pre-approval. Not only will this improve your DTI ratio, but it will also positively impact your credit score by lowering your credit utilization rate.
The credit utilization rate measures how much of your available credit you’re using. Keeping this ratio below 30% of your total credit limit is a good rule of thumb for maintaining a healthy credit score.
Why Pre-Approval is Worth the Credit Inquiry
While getting pre-approved for a mortgage might cause a slight dip in your credit score, the benefits typically outweigh the drawbacks. Here’s why pre-approval is an intelligent step:
- Sets a Realistic Budget: Pre-approval lets you know exactly how much house you can afford so you can focus on properties within your budget.
- Strengthens Your Offer: In competitive real estate markets, a pre-approval letter signals to sellers that you’re a serious buyer and financially capable of completing the purchase.
- Locks in an Interest Rate: Some lenders allow you to lock in an interest rate at pre-approval, protecting you from rising rates while you shop for a home.
The pre-approval process provides valuable information that can make the home-buying experience smoother and more efficient. The slight and temporary drop in your credit score is a small price to pay for the confidence and negotiating power that pre-approval gives you.
Conclusion
Getting pre-approved for a home loan does affect your credit, but the impact is usually minor and temporary. The hard inquiry from the pre-approval process may lower your score by a few points. Still, it’s a necessary step in securing a mortgage. By checking your credit in advance, timing your applications within the shopping window, and avoiding new credit, you can minimize the impact on your score.
Ultimately, the benefits of getting pre-approved—such as knowing your budget, strengthening your offer, and potentially locking in a better interest rate—far outweigh the minor dip in your credit score. By approaching the process strategically, you can navigate the home-buying journey with confidence and financial clarity.
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