Does Getting Mortgage Pre-Approved Impact Your Credit Score?
3 min read
Pre-arranging a mortgage loan is an important step in buying a home. It helps you understand how much you can borrow and shows sellers that you are a serious buyer. However, many potential homebuyers ask whether pre-approving a mortgage affects their credit score. Let’s delve into this question to understand the impact and address any concerns.
What is Mortgage Pre-Approval?
Before diving into the impact on your credit score, it’s important to grasp what mortgage pre-approval entails. Mortgage pre-approval is a process where a lender evaluates your financial information—such as income, assets, debts, and credit history—to determine how much they are willing to lend you for a home purchase. This assessment gives you a clear idea of your budget and strengthens your position when making an offer on a home.
Soft vs. Hard Credit Inquiry
To understand how mortgage pre-approval affects your credit score, it’s crucial to distinguish between two types of credit inquiries: soft inquiries and hard inquiries.
Soft Inquiries:
Definition: Soft inquiries occur when you or a creditor checks your credit report as part of a background check that doesn’t impact your credit score.
Examples: Checking your own credit score, pre-approval screenings by lenders, or when a potential employer runs a background check.
Hard Inquiries:
Definition: Hard inquiries happen when a lender pulls your credit report with your permission as part of the application process for a Florida Loan or credit card.
Impact: They can affect your credit score and typically remain on your credit report for up to two years, though their impact diminishes over time.
Impact of Mortgage Pre-Approval on Your Credit Score
When you apply for Mortgage Pre Approval, the lender will conduct a hard inquiry into your credit history. This inquiry helps them assess your creditworthiness accurately. Here’s how it affects your credit score:
- Temporary Dip in Score: When a lender performs a hard inquiry, your credit score may drop by a few points. This temporary decrease is usually minimal, typically around 5 points or less.
- Multiple Inquiries: If you’re shopping around for mortgage pre-approval and apply with multiple lenders within a short period, the credit bureaus typically recognize this as rate shopping and may treat it as a single inquiry. This minimizes the impact on your credit score.
- Long-term Impact: While hard inquiries remain on your credit report for up to two years, their effect on your credit score diminishes over time. They are considered less significant after the first year and have no impact after two years.
Why Does Mortgage Pre-Approval Affect Your Credit Score?
Understanding why mortgage pre-approval impacts your credit score can help alleviate concerns:
- Risk Assessment: Lenders need to assess your creditworthiness to determine if you qualify for a mortgage and at what interest rate. A hard inquiry provides them with a current snapshot of your credit history and helps them make an informed decision.
- Consumer Protection: Credit scoring models distinguish between rate shopping and applying for multiple loans. They understand that consumers may shop around for the best mortgage rates and minimize the impact on their credit score accordingly.
Tips to Minimize the Impact on Your Credit Score
While getting pre-approved for a mortgage is necessary, you can take steps to minimize any negative impact on your credit score:
- Plan Ahead: Research lenders and narrow down your choices before applying for pre-approval to minimize the number of hard inquiries.
- Shop Smart: Limit your applications to a short timeframe, typically within 30 days, to ensure credit bureaus recognize them as a single inquiry.
- Monitor Your Credit Report: Stay informed about any changes to your credit report and ensure all information is accurate.
- Focus on Your Financial Health: Maintain good credit habits, such as paying bills on time and keeping credit card balances low, to mitigate the impact of inquiries on your overall creditworthiness.
Conclusion
In conclusion, while getting a mortgage pre-approved does affect your credit score slightly due to the hard inquiry, the impact is usually minimal and short-lived. It’s an essential step in the home-buying process that provides clarity on your budget and strengthens your offer when competing with other buyers. By understanding the distinction between soft and hard inquiries and taking proactive steps to manage your credit responsibly, you can navigate the mortgage pre-approval process confidently.
