Does a Mortgage Pre-Approval Affect Your Credit?
Understand the credit implications of mortgage pre-approval and how to manage its impact on your financial standing.
Obtaining a mortgage pre-approval is a common step for homebuyers. Many prospective homebuyers wonder about the potential impact on their credit score. This concern is understandable, as a strong credit profile is important for securing favorable loan terms. While there is typically an effect on your credit score, it is generally minor and temporary.
Understanding Mortgage Pre-Approval and Credit Checks
A mortgage pre-approval is a formal assessment by a lender to determine how much money you can borrow for a home loan. This process involves a thorough review of your financial information, including your income, assets, and credit history, to establish your creditworthiness. A standard part of this evaluation is a “hard inquiry” into your credit report.
A hard inquiry, also known as a “hard pull,” occurs when a lender formally requests your full credit report as part of a credit application. This differs from a “soft inquiry,” which might happen when you check your own credit score or when a company pre-screens you for an offer. Soft inquiries do not affect your credit score.
It is important to distinguish pre-approval from “pre-qualification”; while pre-qualification often relies on self-reported information and may involve only a soft inquiry or no credit check, pre-approval almost always requires a hard inquiry to verify your financial details.
The Impact on Your Credit Score
A hard inquiry typically results in a small, temporary dip in your credit score. This reduction is usually minor, often just a few points, such as 3 to 10 points. While a hard inquiry remains on your credit report for up to two years, its actual effect on your credit score is generally shorter, usually lasting for about 12 months. Over time, this impact diminishes, and with responsible credit management, your score can recover relatively quickly.
To accommodate the practice of comparing loan offers, credit scoring models incorporate a “rate shopping” rule for mortgage inquiries. If multiple mortgage-related hard inquiries occur within a specific timeframe, they are typically treated as a single inquiry. This window usually ranges from 14 to 45 days, depending on the credit scoring model used. This allows you to shop around with various lenders for the best mortgage terms without incurring multiple negative impacts. Completing your mortgage shopping within this condensed period can help minimize the cumulative effect on your credit.
Strategies for Your Credit Before Pre-Approval
Before initiating the mortgage pre-approval process, optimize your credit health. Begin by obtaining copies of your credit reports from all three major credit bureaus (Equifax, Experian, and TransUnion) through AnnualCreditReport.com. Review these reports carefully for any inaccuracies or errors, and dispute them promptly if found. Correcting discrepancies can help ensure your credit score accurately reflects your financial history.
Another important strategy is to reduce your existing debt, especially high-interest credit card balances. Lowering your credit utilization ratio—the amount of credit you use compared to your total available credit—can significantly improve your credit score. Aim to keep this ratio below 30% for the best impact.
Additionally, it is advisable to avoid applying for new credit or making large purchases in the months leading up to and during the pre-approval process. These actions can help maintain a stable credit profile, positioning your score to better absorb the minor impact of a hard inquiry and potentially secure more favorable mortgage terms.