Does Getting Preapproved Hurt Your Credit?
Buying a home can be stressful, especially when a limited number of houses are available on the market. If you’re looking for ways to stand out in a seller’s market, getting preapproved will give you an edge over other buyers.
When you get preapproved for a mortgage, you’ll provide your lender with certain financial information, and they’ll take a look at your credit report. If everything looks good, they’ll give you a preapproval letter which you can show the seller when you make an offer on a home.
But since mortgage preapproval involves a credit inquiry, does getting preapproved hurt your credit? This article will explain how the mortgage preapproval process works as well as its effect on your credit score.
What Is Preapproval For A Mortgage?
Mortgage preapproval is the first step most people will take in the home buying process. When you apply for preapproval, your lender will review your finances and determine whether you’re a good candidate for a home loan.
Specifically, they’ll look at your credit history, debt-to-income (DTI) ratio and current income. This information helps your lender see how much of a lending risk you are and to determine whether you qualify for a loan.
Once you’re preapproved, your lender will give you a preapproval letter detailing how much you’re approved to borrow, the interest rate and repayment terms. This letter will help you when you begin looking at houses because it shows sellers that you’re a serious candidate to buy their home.
Getting preapproved for a mortgage loan is a good sign that the lender is willing to approve you for a mortgage. However, it’s not a 100% guarantee — your lender may not approve you for the loan if your financial circumstances change.
Does Preapproval Hurt Your Credit?
When you get preapproved, your lender will do a hard credit pull which can cause your score to decrease slightly. But this shouldn’t negatively impact your credit score in the long run. And a slight drop in your credit score is worth the benefits of getting preapproved for a mortgage.
However, hard inquiries can stay on your credit report for up to two years, so you want to limit how many times you apply for preapproval. Getting prequalified may be a better option if you’re still shopping around for different lenders.
How Does A Mortgage Preapproval Affect Your Credit Score?
During the mortgage preapproval process, your lender will review your financial information and look at your credit report. This process is often referred to as a credit inquiry, and there are two types: hard inquiries and soft inquiries. A soft inquiry doesn’t have any impact on your credit score, but a hard inquiry can cause a slight decrease.
Does Prequalification Affect Your Credit Score?
Getting prequalified isn’t the same thing as getting preapproved for a mortgage. Prequalification is a much easier process since your lender will do a basic review of your credit score and financial information. Since prequalification involves a soft credit inquiry, it won’t affect your credit score at all.
Is Preapproval A Hard Inquiry Or A Soft Inquiry?
There are many advantages of mortgage preapproval, but its impact on your credit is one of the downsides. That’s because a mortgage preapproval triggers a hard inquiry on your credit report. It’s a good idea to understand how hard inquiries work and how they differ from soft inquiries.
Hard Credit Inquiry
When a lender reviews your credit to decide whether to approve you for a mortgage, they’ll do a hard inquiry on your credit report. Since this inquiry associates you with new debt, it may temporarily impact your credit score.
You’ll likely only face a slight drop in points with one or two hard inquiries, which won’t significantly affect your score. But multiple hard inquiries in a year may have a more substantial impact.
Soft Credit Inquiry
A soft inquiry occurs when your lender provides you with a rate quote. If you ever applied for a credit card or received preapproval for a credit card in the mail, that was the result of a soft inquiry. Soft inquiries don't impact your score since you aren’t actually applying for new credit.
How Long Will Preapproval Affect Your Credit?
A hard credit inquiry will cause your credit report to drop a few points. This inquiry will stay on your credit report for roughly two years before being removed.
The Bottom Line
Getting preapproved for a mortgage can make a big difference in a competitive real estate market. But it’s a good idea to limit how many times you apply for preapproval.
Multiple mortgage applications can hurt your credit score and chances of buying a home. If you’re ready to move forward in the home buying process, you can get started today.