Does Preapproval Affect Your Credit Score?

If you’re looking to buy a home, you’ve probably at least heard that it’s a good idea to get preapproved. However, you might also know that it involves a credit check. Given this, a logical question to ask is: Does a preapproval affect your credit score?

We’ll answer this question and reveal the details you should pay attention to if you’re looking to get a mortgage preapproval.

How Does A Mortgage Preapproval Work?

Mortgage preapproval gives buyers a chance to find out how much they can afford before they begin to shop for homes. A lender will review a buyer’s credit report, income, assets and debts and determine how much they can borrow on a mortgage. It’s not required when buying a house, but it helps buyers determine their budget and address any potential issues that could affect financing. 

Buyers can also get a prequalification. While some may use the terms interchangeably, being preapproved is different from being prequalified. In a prequalification, your credit may or may not be checked and the lender only relies on your verbal or written estimates of your income and assets. Given this, prequalifications are only a best guess at what you can afford. You should look to be very clear with lenders about the type of approval you’re getting.

When possible, it’s always best to get a full preapproval. Sellers and real estate agents prefer preapprovals because they show you’re financially able to make the offer you’re making.

Because there’s a credit check involved, you may decide it makes sense to narrow your lender search before formally getting preapproved. However, we’ll also look at ways to limit the impact of credit checks.

Does Preapproval Hurt Your Credit?

Inquiries for new credit make up 10% of the FICO^® Score formula used by lenders to determine whether you qualify for a mortgage or most other loans or credit accounts. That said, not every inquiry is treated the same for the purposes of credit impact.

The effect preapproval can have on your credit score depends on whether you initiated the inquiry by filling out a loan application, thus generating a hard inquiry. For example, if you apply for a mortgage, the lender will make a hard inquiry; if you receive an unsolicited but “preapproved” credit card offer, it means the prospective lender targeted you through a soft inquiry, which will not affect your credit score. 

To really simplify this, if a lender is checking your credit for the purposes of sending you some sort of offer, it’s a soft inquiry. If you ask the lender to check your credit in the process of being approved for a loan, it’s a hard inquiry.

How Does Getting Preapproved For A Mortgage Hurt Your Credit?

When a mortgage lender pulls a borrower’s credit score, it requires a hard inquiry, which is required with a mortgage preapproval.

A hard inquiry of any kind when you apply for a loan or credit is likely to temporarily reduce your credit score. However, as noted earlier, credit inquiries only make up 10% of your score. The effect of a hard inquiry is going to be relatively small compared to other factors that determine your score. 

The exact impact that a credit inquiry has on your score is going to depend on your credit history and the other things in your report. People really are like credit snowflakes in that everyone is different. However, FICO^® itself says that for most people, the impact on your score of a credit inquiry is less than 5 points.

Credit Checks: Hard Vs. Soft Inquiries

Here are the differences between a hard and soft credit pull:

• Hard inquiry: When you apply for a mortgage preapproval, auto loan or personal loan, it triggers a hard inquiry on your credit. In general, shopping around for anything allows you to make sure you’re not overpaying and that you can get the best deal. And when you shop around within a specific window – 45 days for mortgage lenders – multiple hard inquiries are treated as one. This means that you can apply to as many mortgage lenders as you want during that window to compare things like interest rates and approval amounts without worrying about multiple inquiries having a major impact on your credit.
• Soft inquiry: When you’re not applying for credit or a loan, but you’re receiving an offer that may even be totally unsolicited, that’s where lenders and creditors do what’s called a soft inquiry on your credit. This is most common with something like a credit card preapproval where they actively send offers to qualified clients. Student loan lenders sometimes follow a similar strategy. These soft inquiries have no impact on your credit score whatsoever.

How Long Is Your Credit Score Affected?

Hard inquiries only impact your score for a limited time and the impact is minor. They remain on your report for 2 years, while only inquiries made in the last year affect your score, according to FICO^®.

In the meantime, there are a number of ways that borrowers can improve their credit score either before or after applying for a preapproval.

One way is to always pay your bills on time. If you pay your bills on time, this positively affects your score. It’s never too late to start good habits. If you make your payments each month, that will slowly diminish the impact of past late payments. 

Another important concern is to not apply for credit while house hunting. While the impact of new hard inquiries is minimal, it does lower your score slightly for a while. This can make a big difference if you’re on the edge of qualifying for a specific loan option. Not only that, but your interest rate is also heavily impacted by your credit score, so you want it to be as high as possible, and if you can help that by not applying for a car and a house at the same time, do it.

It’s never a bad idea to monitor your credit report, but this can be particularly important when getting a big loan like a mortgage. Since you’ll be under extra scrutiny, you’ll want to keep a close eye on things. If you see any errors, you can work to proactively correct them by filing a dispute, but you have to know about them first.

Benefits Of A Mortgage Preapproval

There are many benefits of getting preapproved for a mortgage. By having a set budget ahead of time, you don’t have to waste time looking at homes out of your price range. And because the lender already has your financial information in their system, it can help speed up the closing process.

Once you’re preapproved, you’ll receive a Verified Approval Letter from the lender, which can make your offer stand out even more to a seller. It shows that you’re a serious buyer, and the seller can rest assured that you can afford the property and your financing won’t fall through before closing.

The Bottom Line

Getting preapproved for a mortgage or any other loan or line of credit will likely bring your credit score down slightly for a short time. However, it’s important to note that the impact is usually less than 5 points.

Feeling like you’re ready for the next step? Connect with an agent today to kick-start the home buying process!