Do Mortgage Pre-Approvals Affect Your Credit Score?
Find out how a mortgage pre-approval affects your credit score. Understand the nuances of credit inquiries and how to manage your credit during the home buying process.
A mortgage pre-approval represents a lender’s preliminary assessment of your financial capacity to borrow for a home loan. This process involves a review of your credit history to determine your creditworthiness and the maximum amount you qualify for. While a mortgage pre-approval does involve a credit check, its influence on your credit score is generally minor and temporary.
Understanding Credit Inquiries
Credit inquiries are a regular part of financial activity, categorized into two main types: soft inquiries and hard inquiries. A soft inquiry occurs when an individual checks their own credit score or when a lender pre-screens consumers for promotional offers. These inquiries do not affect your credit score and are typically not visible to other lenders. They serve as a preliminary look at your credit profile.
A hard inquiry happens when a lender formally requests your credit report as part of a loan or credit application. This type of inquiry is recorded on your credit report and can cause a slight, temporary dip in your credit score. Mortgage pre-approvals necessitate a hard inquiry because the lender evaluates your credit risk for a potential loan and confirms your financial stability before issuing a pre-approval letter.
Impact on Your Credit Score
A single hard inquiry for a mortgage pre-approval typically causes a modest decrease, often in the range of one to five points, on your credit score. This minor adjustment usually recovers within a few months, demonstrating a temporary effect on your overall credit health. The specific duration and extent of the impact can vary depending on your existing credit history.
Major credit scoring models, such as FICO, account for consumers comparing loan offers from multiple lenders. Several mortgage-related inquiries made within a concentrated timeframe, generally between 14 and 45 days, are often treated as a single inquiry for scoring purposes. This “rate shopping” rule recognizes that consumers are seeking the best terms for one significant loan, rather than applying for multiple new credit lines, minimizing the negative impact on your score.
Managing Your Credit During the Mortgage Process
After securing a mortgage pre-approval, maintain stability in your financial profile. Avoid opening new credit accounts, such as credit cards or vehicle loans, as this can introduce new debt and alter your credit utilization. Such actions can significantly impact your debt-to-income ratio, which lenders closely scrutinize during the final underwriting process.
Refrain from closing existing credit lines, which might inadvertently reduce your available credit and negatively impact your credit score. Making large purchases on credit, like new appliances or furniture, should also be avoided because they increase your outstanding balances and potentially lower your score. Continue making all payments on time, as even a single missed payment can damage your credit standing and jeopardize your mortgage approval. These disciplined financial behaviors help ensure your credit profile remains strong until your home loan officially closes.