A mortgage preapproval affects your credit score, but the impact is minimal, temporary, and far outweighed by the benefits of preapproval.
For example, getting preapproved gives you a clear home-buying budget so you don’t waste time looking at properties you can’t afford. Furthermore, sellers will take you more seriously if you show you’ve already secured funding.
Read on to dive deeper into mortgage preapprovals and how they affect your credit score.
What is a mortgage preapproval?
Mortgage preapproval is a lender’s conditional commitment to provide you with a home loan up to a specified amount. This amount is based on their review of your credit score, income, debt, and other financial information. Preapprovals for car loans and credit cards work the same way.
Does preapproval hurt your credit score?
Yes, preapproval can hurt your credit score by a few points because it involves a “hard inquiry” or “hard pull” on your credit report. However, these only appear on your credit report for two years and only impact your credit score for one.
Avoiding long-lasting credit dips has less to do with preapprovals and more to do with paying your bills on time and maintaining a low credit utilization ratio . Even then, there are many ways to repair your credit and ensure you have the score you need to buy a house .
How multiple lender inquiries affect your credit score
When shopping for a mortgage, it’s smart to get preapproved by different lenders to compare loan terms. Fortunately, your credit score won’t dip with each credit check, so long as they’re performed in quick succession. Instead, they’re treated as one inquiry.
This is because lenders realize you’re likely comparing rates and only intend to buy one home. Thus, you have a 45-day window for multiple credit checks, after which additional credit checks will be counted separately. This means it’s better to get all your preapprovals done within that grace period.
How does mortgage preapproval work?
Mortgage preapproval is a simple two-step process. You submit your financial documents, and if you meet your lender’s requirements, you receive a preapproval letter for the amount the lender is willing to loan to you.
Submit financial documents
First, you must submit any documents required by the lender to verify your finances . These typically include the following:
- Two months of recent bank account statements
- Two most recent paycheck stubs
- Last two years of tax returns
- Last two years of W-2s
In addition, you’ll need to give the lender permission to check your credit report. If all goes well, you can expect your preapproval to be valid for 60 to 90 days .
Receive a preapproval letter
Once they’ve received your financial documents, the lender will review them to determine your ability to repay a mortgage and what size monthly payment you can afford. From there, they’ll determine the maximum loan size they’re willing to lend and under what terms. This information is then printed on an official preapproval letter and given to you.
Having a preapproval letter on hand is a major advantage. For one, it tells you how much you can afford to spend on a home, so you don’t waste time looking at homes outside your budget.
Secondly, when sellers see that you’ve been preapproved for a mortgage, they’ll have more confidence that the sale will go through, giving you a competitive advantage over non-preapproved buyers. And since getting preapproved is free, you have little to lose.
Preapproval vs. prequalification
Though often used interchangeably, preapproval and prequalification are different. Preapproval is a lender’s commitment based on their review of your finances, while prequalification is a lender’s commitment based on your self-reported financial information. In other words, preapprovals are stronger than prequalifications and, consequently, valued more by sellers.
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Types of credit inquiries
It’s important to understand the difference between the two types of credit checks: hard and soft.
Hard inquiries
A hard inquiry occurs when a lender checks your credit report as part of a loan application. While it can lower your score slightly, the impact only lasts up to a year and only stays on your credit report for up to two. Plus, multiple hard inquiries within 45 days are treated as one.
For example, if you apply for a mortgage, you might see your credit score dip by a few points. However, this usually won’t change your prospects of getting a loan or even your interest rate.
Soft inquiries
A soft inquiry occurs when someone checks your credit without you applying for a loan. Unlike with hard inquiries, there’s no impact on your credit score.
Common examples of soft inquiries include when you check your own credit score, an employer checks it as part of a background check, or a creditor looks at it to raise your credit limit.
Should you get preapproved?
Though optional, getting preapproved for a mortgage is a smart idea. The impact on your credit score is minor and temporary, while the benefits of knowing your budget and strengthening your offers are major and long-lasting. For instance, a preapproval letter could make the difference between your dream home offer getting accepted or not.
Just know that a preapproval isn’t a loan guarantee. If your financial situation changes (e.g., you lose your job or incur a major setback), your loan could still be denied. Still, having a preapproval letter is better than not having one.
The bottom line: Preapproval has a minor impact on credit
While mortgage preapproval involves a hard credit inquiry, the impact on your score is small and temporary. More importantly, preapproval gives you a clear picture of your homebuying budget and strengthens your position with sellers.
Ultimately, if you’re serious about buying a home, getting preapproved is an essential step that can bring you closer to landing the keys to your future home. Get preapproved for a Visto Mortgage ® today or learn more about home loans to prepare yourself for when you need one.
Christian Allred is a freelance writer whose work focuses on homeownership and real estate investing. Besides Visto Mortgage, he’s written for brands like PropStream, CRE Daily, Propmodo, PropertyOnion, AIM Group, Vista Point Advisors, and more.
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