Although it is not a requirement, a mortgage pre-approval has many benefits, including saving time and giving you an edge over buyers who haven’t been pre-approved. Because the pre-approval process requires an inquiry into credit scores to determine interest rates and mortgage eligibility, many homebuyers hesitate to start the process because they believe it will affect their credit score.
Inquiries indeed impact credit scores, but the score reduction is usually short-lived, and the inquiry drops off credit reports after two years. Plus, during this process, multiple inquiries from different lenders are counted as a single inquiry if they are made within the same 14-45 day period.
Are you still concerned that rate shopping will hurt your credit score? Here’s what you need to understand about credit inquiries for the pre-approval process.
What Is a Mortgage Pre-Approval?
A mortgage pre-approval is a detailed review of your finances conducted by a lending institution. Typically, you will provide information about your income, outstanding debt, credit history, and ability to make a down payment.
Based on this pre-approval, you will know how large of a loan you can get from a lender and the interest rate and fees that you can expect to pay. Keep in mind that pre-approval does not guarantee you will receive the loan. However, it does mean that you have undergone the majority of the financial scrutiny required for approval.
Once pre-approved, you will receive a letter detailing the lender’s willingness to issue you a loan and the terms of the loan. This will give you a leg up over those who have not proved they are in the financial position to make the purchase.
How Does Mortgage Rate Shopping Affect Your Credit Score?
Part of the mortgage pre-approval process includes a credit inquiry, which occurs when a lender checks your credit. This is a necessary part of the process, yet it is also one of the factors that keep homebuyers from getting pre-approved. So let’s get a few things straight:
It is true that …
It is true that too many inquiries can negatively affect your credit score. Too many inquiries signals to the lender that you are aggressively seeking credit, potentially indicating that you are in financial trouble or have a significant amount of debt. Plus, consumers who have several inquiries are more likely to declare bankruptcy than those who have none.
It is also true that a lower credit score means a mortgage will come with a higher interest rate and be more difficult to qualify for.
It is not true that …
It is not true that credit inquiries made during the pre-approval process will have a lasting impact on your credit score.
The credit inquiries that occur during pre-approval are hard credit pulls, which typically only affect credit scores by less than five points and vary according to the type of creditor conducting the inquiry, the type of loan, and the homebuyer’s current credit profile. The score reduction is usually short-lived, and the inquiry drops off credit reports after two years.
Minimizing the Impact on Your Credit Score
Different lenders will use different credit scoring models when going through the pre-approval process. These scoring models determine the window of time when multiple credit inquiries count as a single inquiry, thereby minimizing the impact on your score.
The two main credit scoring models are FICO and VantageScore:
- FICO offers homebuyers a 45-day window for rate shopping.
- VantageScore has a narrower period of only 14 days.
Make sure to ask your lender about which scoring model they use to ensure the credit inquiries stay in the same window of time. Past this timeframe, the inquiries stand alone and have a more significant, lasting impact on your score.
Find Guidance on the Path to Homeownership with radius
We understand that the path to homeownership comes with plenty of questions. Lucky for you, we have the answers. By working with a Loan Officer, you will have access to a professional with a wealth of knowledge about the entire home-buying process.
If you are not ready to speak to a Loan Officer, be sure to take advantage of our free resources, such as our affordability calculator. We hope to hear from you soon!