There’s one key step you should take to boost your odds of landing your dream home: getting preapproved for a mortgage loan with a lender.
If you do this, sellers will view you as a more attractive buyer. Sellers who receive multiple offers are more likely to choose buyers who are preapproved for a mortgage than buyers who haven’t received initial approval. But does getting preapproved for a mortgage hurt your FICO® credit score? Slightly, but the dip in your credit score will be temporary. The advantages of getting preapproved far outweigh the small hit to your score.
Getting pre-approved for a mortgage is an important step for homebuyers It shows sellers you’re able to get financing and gives you an estimate of your borrowing power But does going through pre-approval hurt your credit?
The short answer is yes – mortgage pre-approval requires a hard credit pull which can temporarily lower your credit score. However if done right, the impact should be minor and short-lived.
In this comprehensive guide, we’ll break down what pre-approval is, the different types of credit pulls, how pre-approval affects your credit, ways to minimize the damage, and tips to get your credit ready for the home buying process.
What is Mortgage Pre-Approval?
Pre-approval is when a lender thoroughly reviews your finances to determine the loan amount you qualify for. This involves verifying details about your income, assets, debts, and credit history.
Once approved, you’ll receive a pre-approval letter that states the maximum home loan amount you’re eligible to borrow. This shows home sellers that you can obtain financing for the purchase price.
Pre-approval is different from pre-qualification, which is a cursory review based on the information you provide. Pre-qualification gives a ballpark estimate without documentation or a credit check.
The Different Types of Credit Pulls
There are two main categories of credit pulls – soft pulls and hard pulls:
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Soft Pulls – Also called soft credit inquiries, these don’t affect your credit score. Soft pulls are used for things like pre-screening offers, checking your own credit, or by creditors monitoring your account.
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Hard Pulls – Also known as hard credit inquiries, these can temporarily lower your credit score but are required when applying for new credit. This includes mortgage pre-approval.
Hard pulls let lenders check your credit reports when you want to borrow money. Too many hard inquiries in a short time frame can be seen as “credit hungry” behavior and hurt your credit score.
How Pre-Approval Impacts Your Credit Score
Pre-approval requires your lender to do a hard pull on your credit report. This means it can negatively impact your credit score. However, the effect is usually minor, especially if you have a long history of responsible credit usage.
Here are some key points on how pre-approval affects your credit:
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The dip in your credit score from one mortgage pre-approval hard pull is typically less than 10 points.
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Those with short credit histories may see a slightly bigger drop. But for most, it’s a low single-digit decrease.
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The impact is temporary – your score will recover within a few months.
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Multiple pre-approval applications within 45 days count as a single hard pull.
While pre-approval does lower your score, it allows you to get firm approval and start making competitive offers. If you limit applications to 45 days, the damage should be limited.
Ways to Minimize the Credit Impact
Here are some tips to get pre-approved while minimizing the credit impact:
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Check your credit reports – Make sure there are no errors negatively affecting your score before applying.
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Pay down debts – Lower credit card balances can boost your score prior to pre-approval.
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Compare within 45 days – Hard pulls within 45 days are grouped and count as one inquiry.
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Avoid new accounts – Don’t open new credit cards right before pre-approval, as this can lower your score.
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Track your score – Monitor your score using a free tool like CreditWise so you can see the real impact.
As long as you limit hard pulls to a 45-day window, the credit effect should be small and temporary.
Getting Your Credit Ready for Pre-Approval
Here are some steps to take in advance of pre-approval to make sure your credit is in good shape:
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Check credit reports – Verify all information is correct, dispute any errors.
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Pay down debts – Target having total balances under 30% of limits.
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Make payments on time – Payment history is a major factor in your credit score.
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Hold off on new credit – Don’t open new credit cards right before pre-approval.
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Monitor your score – Use a free tracking tool so you can address any drops.
Starting the pre-approval process with your credit in top shape will minimize any dips and help you qualify for better rates.
The Takeaway – Expect a Small, Temporary Dip
Going through mortgage pre-approval requires a hard credit pull, which can cause your credit score to drop a few points temporarily. However, you can minimize the damage by limiting applications to 45 days, avoiding new accounts, and ensuring your credit is solid beforehand.
While pre-approval has a short-term credit impact, the benefits of having a firm approval letter in-hand when you want to make an offer outweighs the small credit dip for most homebuyers. As long as you take some prudent steps to prepare your credit before applying, the effect should be minor.
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How does mortgage preapproval work?
When you’re shopping for a home, it’s useful to know how much you can afford so you don’t waste valuable time looking at homes outside your price range.
A mortgage preapproval can help you set a home buying budget and demonstrate to real estate agents and sellers that you’re serious about buying. The preapproval process involves a few steps.
You’ll start the preapproval process by submitting copies of key financial documents so a lender can verify your income. Applicants typically submit:
- 2 months of recent bank account statements
- 2 most recent paycheck stubs
- 2 last years of tax returns
- 2 last years of W-2s
You’ll also have to give the lender permission to check your credit reports.
Can I get Pre-approval letter without Hard Pull Credit? Explained by LJ
FAQ
Can you still get denied after pre-approval?
How much does a preapproval hurt your credit?
Is getting pre-approved for a car a hard inquiry?
Does pre-approval mean you are approved?
Does a soft credit pull affect a pre-approval?
Yes, some lenders offer pre-approvals based on a soft credit pull, which doesn’t affect your score. These are typically used for pre-qualifications, providing an estimate of how much you can borrow. How does Mortgage Maestro Group use soft credit pulls during the pre-approval stage?
What’s the difference between a preapproval and a final approval?
A preapproval indicates you meet the basic requirements for a specific credit card, but you shouldn’t interpret it as a guarantee. Final approval is still subject to a hard credit inquiry for a more thorough review of your credit along with your income, debt balances and other factors.
Does pre-approval affect my credit score?
With preliminary pre-approval, you can submit your financial information and authorize a soft pull of your credit report to give the lender an overview of your score. Unlike the hard pull of a traditional pre-approval (also called an inquiry), a soft pull does not impact your credit score.
What happens if you respond to a preapproved offer?
If you respond to a preapproved offer from a credit card issuer and submit an application, the card issuer will do a more thorough review of your credit. However, a preapproval for a mortgage or car loan usually requires a hard credit inquiry that could result in a small, temporary dip in your credit scores. What Is Preapproval?
Do lenders take out a hard credit check during pre-approval?
These lenders will take out a hard credit check on you during pre-approval since this is a standard step in the mortgage approval process. Hard credit checks are required almost all the time because mortgage lenders need to evaluate whether you can shoulder your mortgage repayments if you get approved.
What is the difference between preapproval and prequalification?
Preapproval differs slightly from prequalification, but knowing how both work can be helpful. There are two types of credit inquiries. Hard inquiry, or hard pull. A hard inquiry occurs when a creditor takes an in-depth look at your credit report after you have applied for credit.