Does mortgage preapproval affect your credit score?
Getting preapproved for a mortgage will hurt your score, but not for long
Getting preapproved for a mortgage can make the homebuying experience easier. Mortgage preapproval lets you know how much you can afford to borrow, and it shows sellers you're approved for enough financing to purchase the home you want.
That said, mortgage preapproval requires a hard credit check, so you may see a short-term impact on your credit score. Read on to learn how mortgage preapproval affects your credit score and how long the impact lasts.
Key insights:
- A mortgage preapproval letter shows the amount you can borrow. It can help you determine the down payment you need to buy a home at the price point you want.
- During the mortgage preapproval process, lenders do a hard credit check and verify information such as your assets, income, employment and other debts.
- Mortgage preapproval decreases your credit score, but the drop will be short-lived.
What is mortgage preapproval?
Dan Green, the CEO of Homebuyer, a lender for first-time buyers, calls mortgage preapproval a "dress rehearsal" for your actual mortgage approval. As such, mortgage preapproval requires a hard credit check, which will appear on your credit report.
Lenders also review your income, assets and credit history. Lenders can begin the preapproval process once you fill out a loan application and supply the documentation they ask for, such as pay stubs and proof of assets.
"Preapprovals are your proof that you can get a mortgage approved to buy this home," said Green.
How does mortgage preapproval affect my credit?
Some loan inquiries only require a "soft pull" on your credit. Soft pulls are used to approve credit for promotional purposes, but they don’t necessarily mean you're borrowing money. Because of this, they don’t affect your credit score.
Mortgage preapproval requires a "hard inquiry" or a "hard pull" on one or more of your credit reports with the national credit bureaus. This move can decrease your credit score, since it shows you plan to acquire new debt.
Fortunately, applying for mortgage preapproval won’t cause your credit score to plummet. Green said mortgage preapproval could lead to a five- to 10-point drop in a borrower's FICO score if they’re a first-time homebuyer with limited credit history.
Applicants with a long history of responsible credit use may see less impact, depending on the information in their application.
"For a buyer with deeper credit experience, the effect is nominal or nonexistent," said Green.
How long will a preapproval affect my credit score?
Any impact mortgage preapproval has on your credit score will be short-lived, only lasting a few months, even though hard inquiries stay on your credit reports for two years.
According to the Consumer Financial Protection Bureau (CFPB), you won't see subsequent impacts on your credit if you opt to get preapproved for a mortgage with more than one loan company. Credit checks from multiple mortgage lenders within a 45-day period count as a single inquiry on your credit reports.
What can I do to get my credit ready for preapproval?
Whether you tried to get preapproved for a mortgage and didn't like your results, or you’re gearing up to apply for preapproval soon, there are steps to take to make sure your credit is in good shape. Keep in mind that a better credit score can help you qualify for more types of home loans and secure a lower interest rate.
- Check your credit reports for errors. Check your credit reports with the three credit bureaus — Experian, Equifax and TransUnion — for free at AnnualCreditReport.com. If you find false information, such as incorrect balances or wrongly listed late payments, you can dispute it.
- Avoid opening or closing any new credit accounts. "New credit" and "length of credit history" make up 10% and 15% of your FICO score, respectively. You can prevent drops to your score by not opening new accounts and by keeping old ones open.
- Pay down existing revolving debt. How much credit debt you have compared with your credit limit (credit utilization ratio) makes up 30% of your FICO score. Strive to pay down as much credit card debt as you can. Most experts suggest keeping your credit utilization ratio below 30%.
- Pay your bills early or on time. Your payment history is the most important element of your credit score (35%), so try to pay every bill early or on time.
FAQ
What factors affect preapproval?
Mortgage preapproval depends on various factors that prove your creditworthiness and ability to repay the loan. These include your credit score, income, down payment amount and debt-to-income (DTI) ratio.
How is preapproval different from pre-qualifying?
As a general rule, preapproval is a step that is further along in the mortgage process than pre-qualification. Pre-qualification gives you a less precise idea of how much you may qualify to borrow and at what rate, based on information you provide; it doesn’t require documentation or a hard credit check. Preapproval requires a more in-depth look at your qualifications; the lender will ask for supporting documents and get your permission for a hard credit check. The process with each lender differs, so be sure you understand what the definitions of “pre-qualification” and “preapproval” are at each company.
Is there a downside to getting preapproved for a mortgage?
Getting preapproved for a mortgage is a good idea if you plan to buy a home soon and want to know exactly how much you can borrow — and at what rate. Once you’re preapproved, most lenders provide a preapproval letter you can include with your offer, showing a seller that you have the financial backing to purchase a property. The downside is a small, temporary drop in your credit score, so don’t seek preapproval until you are ready to start making offers.
Bottom line
While mortgage preapproval does result in a hard inquiry on your credit report, you shouldn't worry about it too much. Any impact on your credit score is small and temporary. You can minimize the effects on your credit by limiting your preapproval applications to a 45-day period. Before the clock starts, check your credit report for mistakes and, if necessary, take steps to improve your score. This way, you’ll put yourself in the best position to be approved for different types of mortgages at the lowest rates.
- Article sources
- ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page. Specific sources for this article include:
- Consumer Financial Protection Bureau, "Get a prequalification or preapproval letter." Accessed Dec. 10, 2022.
- Consumer Financial Protection Bureau, "What's a credit inquiry?" Accessed Dec. 10, 2022.
- Consumer Financial Protection Bureau, "What exactly happens when a mortgage lender checks my credit?" Accessed Dec. 10, 2022.
- Experian, "How Long Do Hard Inquiries Stay on Your Credit Report?" Accessed Dec. 10, 2022.
- FICO, "What's in my FICO Scores?" Accessed Dec. 10, 2022.
- Consumer Financial Protection Bureau, "What's the difference between a prequalification letter and a preapproval letter?" Accessed Dec. 10, 2022.
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