Does Mortgage Preapproval Affect Your Credit Score?

There’s one key step you should take to boost your odds of landing your dream home: getting preapproved for a mortgage loan with a lender.

If you do this, sellers will view you as a more attractive buyer. Sellers who receive multiple offers are more likely to choose buyers who are preapproved for a mortgage than buyers who haven’t received initial approval.

But does getting preapproved for a mortgage hurt your FICO^® credit score? Slightly, but the dip in your credit score will be temporary. The advantages of getting preapproved far outweigh the small hit to your score.

How Does Mortgage Preapproval Work?

When you’re shopping for a home, it’s useful to know how much you can afford so you don’t waste valuable time looking at homes outside your price range.

A mortgage preapproval can help you set a home buying budget and demonstrate to real estate agents and sellers that you’re serious about buying. The preapproval process involves a few steps.

Submit Financial Documents

You’ll start the preapproval process by submitting copies of key financial documents so a lender can verify your income. Applicants typically submit:

• 2 months of recent bank account statements
• 2 most recent paycheck stubs
• 2 last years of tax returns
• 2 last years of W-2s

You’ll also have to give the lender permission to check your credit reports.

Receive A Preapproval Letter

The lender will use your financial information and credit history to determine how much money you can potentially borrow and the interest rate you can expect on the loan. Your lender will supply all this information in a written preapproval letter.

This letter is very important. First, you’ll know the maximum mortgage amount you qualify for. When you know what you can afford, you can avoid wasting your time looking at homes above your price range.

Secondly, sellers often find buyers with preapproval letters more appealing than buyers who don’t have a letter. Sellers are more likely to accept offers from preapproved buyers because it reduces the odds of their home sale falling through. If you get into a bidding war and the offers are roughly equal, the seller is more likely to choose the offer that comes with the reassurance of a preapproval.

It costs nothing to get preapproved for a mortgage, and you can get preapproved with more than one lender.

Preapproval Vs. Prequalification

People often confuse preapproval and prequalification for a mortgage. A prequalification is based on what you tell lenders you earn each month. Lenders will estimate how much you can borrow based on your self-reported information. They don’t check your credit history or verify your income. Preapproved buyers tend to be more attractive to sellers than prequalified buyers because a lender has verified the financial capacity of the preapproved buyer.

Does Preapproval Affect Your Credit Score?

A mortgage preapproval can result in a hard inquiry on your credit report, which can temporarily lower your credit score by a few points. That said, getting preapproved for a mortgage is an important step in the home buying process and is highly recommended.

The good news is that this ding on your credit score is temporary. If you keep paying your bills on time and keep your credit card debt low, your score will recover quickly.

How Multiple Lender Inquiries Affect Your Credit Score

You don’t have to worry if you apply for mortgage preapproval with several lenders within a short time frame because you’re shopping around for the best mortgage rates. Your score won’t drop each time a lender checks your credit.

Because credit bureaus understand you’re likely comparing mortgage rates for only one loan, the bureaus offer a grace period where they count multiple inquiries as a single hard inquiry. So, if three lenders pull your credit within the grace period, the credit bureaus will count all three pulls as a single inquiry and the drop in your credit score will reflect this.

Just make sure to apply for all your preapprovals within quick succession over a few days. That way, multiple inquiries will be counted as a single inquiry.

Types Of Credit Inquiries

There are two types of credit inquiries: hard and soft.

Hard Inquiries

When you apply for credit, like a mortgage, car loan, student loan, credit card or personal loan, lenders will check your credit by performing a hard inquiry that will cause your score to temporarily drop slightly.

If you apply for several loans of the same type within a short period – such as a car loan and mortgage over a week – credit bureaus will likely treat multiple hard inquiries as a single inquiry to minimize the impact and protect your credit score.

Soft Inquiries

A soft inquiry occurs when your credit is checked without you applying for new credit. Soft inquiries don’t cause your credit score to rise or fall.

Checking your own credit is an example of a soft inquiry. When someone else checks your credit, but you’re not applying for credit, that’s also a soft inquiry, and it won’t hurt your credit score. Common examples include a utility company looking at your payment history, an employer running a background check or a creditor increasing your credit limit.

Should You Get Preapproved?

Getting preapproved for a mortgage loan is optional, but it can be one of the most important steps you take in the home buying process. A mortgage preapproval signals to home sellers that you’re a serious buyer and establishes how much home you can afford. Even though a hard inquiry will likely cause your credit score to dip slightly, you shouldn’t skip this step.

The Bottom Line: Preapproval Has A Minor Impact On Credit

If you’re ready to buy a home, getting preapproved with a mortgage lender will help you set a realistic home buying budget. Sellers will likely be more receptive to your offers, and because you know how much home you can afford, you won’t waste your time making offers on homes outside your price range.

If you’re ready to begin the home buying process, start an application for initial approval with Rocket Mortgage^® today.