Buying a home can be stressful, especially when there are a limited number of houses on the market and you’re competing against many other hopeful buyers. Getting preapproved by a lender for a mortgage can help you stand out to sellers, especially in a competitive market where preapproval is often expected.
But since the mortgage preapproval process involves a credit inquiry, you may wonder: Does getting preapproval hurt your credit, and does it affect your credit score? This article will explain more about the mortgage preapproval process and its impact on your credit score.
Key Takeaways:
- A mortgage preapproval letter signals that a lender has determined that you’re qualified to borrow a certain amount of money to buy a home.
- The mortgage preapproval process typically involves a “hard pull” of your credit report, and while it can cause a slight temporary decline in your credit score, it’s unlikely to have a significant impact.
- A hard credit inquiry can stay on your credit report for up to two years, so you want to limit the number of times you apply for mortgage preapproval.
What Does It Mean To Get Preapproval For A Mortgage?
Mortgage preapproval is a step that many people take in the home buying process. When you apply for preapproval, your lender does a thorough review of your finances to determine whether you’re a good candidate for a home loan.
Specifically, they’ll review your credit history, debt-to-income (DTI) ratio and current income. This information helps your lender assess your lending risk and determine whether you qualify for a loan. Lenders need to feel confident that you’ll be able to afford to repay the money you borrow.
If you’re preapproved for a mortgage, your lender will give you a preapproval letter detailing how much money you’re likely to be approved to borrow as well as the potential interest rate and repayment terms for that possible loan.
This preapproval letter can aid you as you begin touring homes, as it will demonstrate to sellers that you’re a highly motivated candidate committed to buying. It can also help you plan your budget since you’ll have a better understanding of the type of mortgage and loan terms you’re likely to be approved for once you start the mortgage application process.
Assuming you have all the required documentation ready when applying, it’s possible to get preapproved for a mortgage in as little as one day – but it could also take several days. Keep this in mind, too: Mortgage preapproval letters expire; most are valid for just 60 to 90 days.
While getting preapproved for a mortgage loan is a good sign that the lender is likely to approve you for a mortgage, it’s not a 100% guarantee. Indeed, your lender may not approve you for the loan if your financial circumstances change after you’ve been preapproved. If you experience any life or financial changes after preapproval, be sure to communicate that with your lender.
Understanding Mortgage Prequalification Vs. Preapproval
Before we explore how a mortgage preapproval can impact your credit, let’s clarify one thing. A mortgage prequalification and a mortgage preapproval are not the same thing. While there are some similarities, the processes differ.
Both can help you gauge the loan amount you may be approved for when you apply for a home loan. And you can typically apply for both a mortgage preapproval and a mortgage prequalification online.
But prequalification can be less accurate than preapproval. To get prequalified, your lender will do an initial review of your finances, and it’s a much faster process. You won’t be asked to provide as much financial information for a prequalification as you are during the preapproval process. Another difference is that your lender won’t perform a hard credit pull for prequalification.
That means with prequalification your lender can only estimate the type of mortgage, loan amount and interest rate you might be approved for if you apply for a loan later. Additionally, the estimates given to you by your lender could change later once you supply more financial documentation and when the lender does a more thorough review of your credit.
Preapprovals, then, are more in-depth and can be much more accurate. Your lender will review your financial documents, DTI ratio, credit history and credit score. This allows them to provide you with more accurate information, which can help you as you shop for a home.
Related: Prequalified Vs. Preapproved: The Key Differences
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Does Preapproval Involve A Hard Inquiry Or A Soft Inquiry?
So, does preapproval affect your credit score? There are many advantages to mortgage preapproval, but its impact on your credit is one downside to consider.
That’s because a mortgage preapproval triggers a hard inquiry on your credit report. Understanding how hard inquiries work and how they differ from soft inquiries can help you make a more informed choice as to whether to apply for preapproval.
Hard Credit Inquiry
Leaders perform a hard inquiry to check your credit score and credit report when you apply for credit. A hard credit check can temporarily impact your credit score – generally, for up to a year – but it may stay on your credit report for up to two years.
You’ll likely face only a slight drop in points with one or two hard inquiries, meaning that your credit score won’t be significantly affected. But multiple hard inquiries in a year could have a more substantial impact.
Soft Credit Inquiry
A soft inquiry occurs when your lender checks your credit as part of a background check. Banks may check your credit without your permission to see if you’ll qualify for a credit card offer. To prequalify you for a mortgage, they perform a soft credit check. Soft inquiries don’t impact your score since you’re not applying for new credit.
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Does Getting Mortgage Preapproval Hurt Your Credit?
As mentioned above, the mortgage preapproval process typically involves your lender doing a hard credit pull. This can cause your credit score to decrease slightly. But it shouldn’t negatively impact your credit score significantly, nor for long. Additionally, a slight drop in your credit score is likely worth getting preapproved for a mortgage, considering the benefits.
Generally, it won’t hurt your credit to get preapproved multiple times, as long as it’s done within a certain time frame.
Here’s why: Credit scoring models typically count multiple credit checks from lenders as a single credit inquiry on your credit report — for a limited time period. This window of time varies from 14 to 45 days, depending on which FICO® Score or VantageScore credit scoring model is used. We include more details about this in the below section.
Consider applying for preapproval from multiple lenders within a two-week period to avoid multiple credit inquiries on your credit report.
How Does A Mortgage Preapproval Affect Your Credit Score?
So, how does a preapproval affect your credit score? Mortgage preapproval requires a more thorough look at your finances and credit compared to prequalification. Since your lender will perform a hard credit pull, you can expect your credit score to be affected. You may notice a slight decrease in your credit score after getting preapproved for a mortgage.
A mortgage preapproval may cause a slight dip in your credit score, but both FICO and VantageScore treat multiple inquiries for home loans within a short shopping period (45 days for FICO, 14 days for VantageScore) as a single inquiry, minimizing the impact.
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How Does Mortgage Prequalification Affect Your Credit Score?
The prequalification process involves a brief review of your financial situation, in which a lender reviews your financial details and performs a soft credit inquiry. Your credit score won’t be impacted at all, so its impact on your credit score differs from that of preapproval.
FAQ
Here are answers to questions commonly asked regarding whether preapproval affects your credit score:
The Bottom Line: Preapproval Is An Important Step In The Home Buying Process
Getting preapproved for a mortgage can make a big difference in a competitive real estate market. But it’s also a good idea to limit how many times you apply for preapproval. Multiple mortgage applications can hurt your credit score and impact your chances of buying a home.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
