How Does A Mortgage Pre-Approval Affect Your Credit Scores?
Are you in the market for a new home? If so, you’re probably wondering what everybody else does when facing mortgage pre-approval: does pre-approval affect your credit score?
It can temporarily hurt your credit score, but the key to understanding what we mean by “temporarily” lies in understanding the difference between a hard vs. soft pull and a few other credit rating factors.
All in all, getting pre-approved can also have some unexpected consequences on your credit score, so it's essential that you understand the impact that this process could have before investing in a mortgage loan.
In this quick guide, we'll take a closer look at how going through the pre-approval process affects your personal credit history and offer helpful tips to make sure your financial standing stays strong throughout the entire process.
What Is Mortgage Pre-Approval?
Mortgage pre-approval is the process an individual goes through to find out how much they can borrow from a mortgage lender. This means the mortgage pre-approval process is incredibly helpful as it allows individuals to understand their financial situation before investing in any property.
It can also be useful for setting a budget and letting prospective sellers know you’re serious about the purchase. Ultimately, mortgage pre-approval gives buyers peace of mind regarding the biggest purchase of their lives.
Pre-Qualified vs. Pre-Approved Mortgages
Before diving into how a mortgage pre-approval works, it’s important to establish that this differs from pre-qualifying for a mortgage loan.
- Mortgage pre-qualification involves a lender estimating how much mortgage you can afford by gathering basic information about your finances, including your income, debt, and liquid assets. This type of mortgage activity does not involve conducting a hard credit check.
- Mortgage pre-approval requires an in-depth review of your credit history and verification of income and bank account information. This more rigorous process gives you a bigger negotiating advantage with sellers because they know you are serious about buying their property since you have been approved for a mortgage loan in advance.
So, does prequalification affect your credit score? No, not like pre-approval can.
Ultimately, mortgage pre-approval offers buyers peace of mind that they have been through the more thorough process and have been approved for their mortgage loan upfront.
FAQ: Does getting preapproved hurt your credit? It requires a hard credit check, yes. In some cases, this can lower your score slightly.
How Does Mortgage Pre-Approval Work?
You will need to complete a mortgage application and provide the following:
- Proof of asset
- Income confirmation
- Good credit
- Employment verification
- Various other financial documents
With this information, the lender can assess how much you qualify for in mortgage terms. They’ll also be able to provide you with an estimate of your estimated monthly payments and interest rate.
As you can see, this means that a lender will look at your FICO credit score along with other credit ranking factors such as your debt-to-income ratio and more. So, it pays to have a good credit rating if you plan on getting pre-approved for a mortgage loan.
Does Pre-Approval Affect Your Credit Score?
So, does getting pre-approved hurt your credit? It can temporarily lower your score, yes. It requires a hard credit check to review your financial history. This hard credit inquiry does affect your credit score, but not significantly.
It will usually only decrease your score by five points or less but can provide an advantage over other competitive home buyers. How long does a hard inquiry affect your credit score? These inquiries stay on your credit report for up to a year. However, as mentioned, they typically only lower your score by about five points or less.
The bottom line? As long as you don't have too many hard inquiries in a short period, a mortgage pre-approval has minimal effect on your credit score and increases your chances of getting the home you desire.
FAQ: What is a soft credit pull? A soft credit pull is a type of credit inquiry that doesn’t impact your credit score. It only gives the lender a soft view of the data, meaning they can view certain information but not a person's full credit history. A good example of a soft inquiry is checking your credit via a credit app.
The Benefits of Mortgage Pre-Approval
Aside from helping improve your chances of getting your dream home, what other benefits are there to mortgage pre-approval? There are two main advantages.
Home Buying Budget
Namely, getting pre-approved for a mortgage loan can give you more confidence and power when making an offer since you have already determined exactly how much house you can afford. This makes it easier to budget for buying a home, making the entire process much faster and easier.
Mortgage pre-approval can boost your application strength because you already have a qualified lender who has looked closely at your financials and carefully determined that you can afford the home loan.
How to Increase Your Chances of Mortgage Pre-Approval
It helps to understand the pre-approval process to increase your chances of pre-approval. The most important element is to have a good credit score, so start with that by ensuring you’re paying bills on time and controlling unnecessary costs and credit card debt if possible.
Gather documents such as payslips, bank statements, and any other financial paperwork that apply. If you have enough funds for a down payment, this can also positively influence pre-approval. It doesn’t hurt to talk to multiple lenders to get pre-approved since they all have different prerequisites and interest rates.
Once pre-approved and shopping for homes, stay within the pre-approved loan limit or budget so the pre-approval status isn’t challenged later.
FAQ: How can I check my credit score without hurting it? One of the easiest ways to check your credit score without hurting it is to use a free credit-building app like Cheese. You are also entitled to one free credit report annually from each major credit bureau.
Boost Your Credit Score With Cheese
Do you think you need to boost your credit score before trying for mortgage pre-approval? We can help. Cheese is a credit-building app that can help boost your credit score via credit builder loans.
You won't have to worry about credit checks or investing in credit monitoring services; Cheese ensures that every payment you make is reported to all the major credit bureaus, giving your credit score an impressive boost over time.
What's more, you even get your payments back in full (minus interest) at the end of the loan. It doesn't get any simpler than this. Make payments, get rewarded, and build your credit with ease! Click here to get started.