Does a Home Loan Pre-Approval Affect Your Credit Score?

A home loan pre-approval is a conditional commitment from a lender, indicating how much money you are eligible to borrow for a house. While it can affect your credit score, the impact is generally minor and temporary.

Understanding Credit Inquiries

When a lender checks your credit history, it results in a credit inquiry on your credit report. There are two types: soft inquiries and hard inquiries. Soft inquiries, or soft pulls, occur when your credit is reviewed without a formal application for new credit. These do not affect your credit score because they are not associated with new credit-seeking behavior. Examples include checking your own credit score or pre-approved credit offers.

Hard inquiries, or hard pulls, happen when you formally apply for new credit, such as a mortgage, car loan, or credit card. This type of inquiry signals you are seeking new credit, which can lead to a slight, temporary adjustment in your credit score.

Pre-Approval’s Impact on Your Credit Score

A home loan pre-approval requires a hard inquiry because the lender evaluates your financial standing and credit history. This hard pull typically results in a small decrease in your credit score, often by fewer than five points. The impact is usually temporary, with scores often rebounding within a few months. Hard inquiries remain on your credit report for up to two years, but their effect on your score diminishes after 12 months.

Credit scoring models, such as FICO and VantageScore, recognize that consumers compare loan offers. Therefore, multiple hard inquiries for the same type of loan, like a mortgage, within a specific timeframe are often treated as a single inquiry. This “rate shopping” window can range from 14 to 45 days. This allows you to compare different mortgage terms without multiple significant impacts on your score.

Pre-Qualification and Pre-Approval Distinctions

Mortgage pre-qualification and pre-approval have distinct implications for your credit score. Pre-qualification is a less formal process, based on self-reported financial information, such as your income and debts. It provides an estimate of what you might afford and typically involves a soft inquiry or no credit inquiry, so it does not affect your credit score.

Pre-approval is a more rigorous process. It involves a detailed review of your financial documents, including income verification and asset statements, and a thorough credit check, necessitating a hard inquiry. While pre-qualification offers an estimate, pre-approval provides a conditional commitment from the lender for a specific loan amount, indicating your ability to secure financing.

Why Pre-Approval Matters

Obtaining a home loan pre-approval offers several advantages in the home-buying journey. It provides a clear understanding of your budget, helping you narrow your home search to properties you can afford. This clarity streamlines the home-buying process, saving time and effort.

A pre-approval letter strengthens your offer, making you a more attractive buyer to sellers. It demonstrates that your finances have been vetted by a lender, making you a serious and capable buyer, which is beneficial in competitive housing markets. Identifying potential financial or credit issues early also allows you to address them before making an offer, preventing delays later.