It’s that time when you’re ready to make an offer on a house. Maybe you’ve looked around and already have an idea of what size house and which amenities will suit you perfectly.
You might have heard about the pre-approval process, but you’re unsure about how it could affect your credit score going forward. In this guide, we’re going to talk about how pre-approval can benefit your house shopping experience, what you need to know about pre-approval in order to do minimal damage to your credit score, and how to shop around and find the best rate without affecting your credit score.
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Hard vs. Soft Inquiries
It’s crucial to know the difference between each of these credit inquiries before you start mortgage shopping because it directly affects you and your credit score. Organizations perform soft inquiries or soft credit checks to do a background check or to send you gift offers for loans in the mail. Soft inquiries are usually not initiated by you and as such they commonly have zero effect on your credit score.
Hard inquiries are more detailed credit reports that are requested by you, or on your behalf. These come into play when you’re applying for a new loan, such as a credit card, mortgage, or auto loan. When you initiate a credit check in this way, you’re essentially requesting a new loan. This is exactly what happens during the pre-approval process.
You can expect a hard inquiry on your credit when you apply for a pre-approval. The credit bureaus can see that you’re applying for a loan and they evaluate your credit accordingly. They take a look at your current loan status and your payment history and go from there.
It is pretty common for people to see a difference in their credit score when house shopping and getting pre-approved. However, don’t panic — it’s usually a pretty tiny drop, nothing that can’t be fixed quite easily with good credit habits over time.
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How Mortgage Pre-Approval Affects Your Credit
The process of pre-approval secures a loan in your name based on your income and credit score. Basically, the bank takes a look at your current finances and credit score and helps you determine a price point when you’re house hunting. Depending on your results, they may suggest a hard stop at a certain price or they could give you a range of mortgage prices that would work for you.
Whatever the case may be, going ahead with the pre-approval process will guarantee that you have the money you need to buy the house you want. It’s a great idea to get pre-approved before you start shopping so that you don’t have any variables up in the air. You’ll already know if you can make an offer on the house you really want. There’s no waiting around to see whether you’ll be approved.
Since you’ll already be approved, your credit will be affected by the hard inquiry performed by your lender. The bank has already set up a loan for you if you should choose to go ahead with buying your home using their mortgage plan. For this reason, it’s important to only go through with the pre-approval process if you’re certain that you’re ready to buy.
The hard inquiry performed during the pre-approval process will go on your credit report and it will show that you’ve been approved for a loan. That said, you do have some leniency when it comes to a pre-approval period.
The credit bureaus will be able to see that you’re shopping around for a good rate and are commonly lenient about you asking for a couple of pre-approvals within a short period of time. However, you don’t want to go overboard and ask for too many pre-approvals. No matter what, checking your credit for a pre-approval will affect your score, but the change should be just a slight one. If you ask for too many hard inquiries in a short amount of time, you could see more of a change to your credit score.
Does Rate Shopping Hurt Your Credit Score?
Rate shopping is when you ask for a pre-approval more than once in a short period of time. You’re curious about what it takes to get approved for a loan with this particular lender, so you ask them to see if you can be pre-approved for a mortgage. They will perform a hard inquiry to see your credit report and check your income and get back to you with whether or not they feel comfortable approving you for a mortgage.
Rate shopping can hurt your credit score if you decide to have several banks run a hard credit check in a short amount of time (or the same one over and over). Just as with any other loan, running too many hard credit inquiries over a small period doesn’t look good to the credit bureaus and they may ding your score.
However, if you have just a couple checks over let’s say a few months, you’ll probably be okay. Or if you get two or three back to back within the “pre-approval period,” the credit bureaus will see that and will likely give you a break. Ideally, you really only want your credit to be checked once, but if you were to decide on a different lender, in the end, two checks wouldn’t do much damage to your credit.
Pre-approval really does depend on what state your credit score is currently in, but overall, expect a hard inquiry to change your credit score very little when you keep the number of credit checks low.
Tips for Getting the Best Rate Without Hurting Your Credit
When you’re looking for a home, shopping around is your best tool. There’s nothing in the rule book that says you can’t talk to multiple lenders, banks, and credit unions in order to see what kind of mortgage requirements they have. Simply start by asking some questions about rates, credit scores, and maybe even price range. You can have these types of preliminary discussions before you ever ask a lender to run your credit. It’s always a good idea to shop around before you decide on the best lender anyway.
If you’re afraid of pushy salesperson tactics, just go ahead and do some research on your own. It’s very common for banks to have this kind of information listed right on their website, so take advantage of it. If you’re truly hoping to get the best rate then you have to be willing to do some research. Banks have varying mortgage lengths, interest rates, and credit requirements, which means it’s a smart idea to get familiar with common rate ranges in your area. That way, you’ll have your pick of the best ones available.
Making the decision to purchase your first home can put some pressure on you when it comes time to make an offer on a house you love. However, the pre-approval process could truly relieve some of that tension during a stressful time. If you can take the time to do some research, talk to a few lenders, and try out a pre-approval or two, you’ll be in good shape for getting the home that you really want.
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