Understanding Credit Inquiries
To understand how pre-approval affects your credit, we need to discuss credit inquiries. When you apply for credit, such as a loan or credit card, the lender typically pulls your credit report to assess your creditworthiness. These inquiries are categorized as either “hard” or “soft.”
Hard Inquiries: A hard inquiry occurs when you apply for credit, and it can impact your credit score. These inquiries are visible to other lenders and may suggest that you’re actively seeking credit.
Soft Inquiries: A soft inquiry, on the other hand, doesn’t affect your credit score. These inquiries occur when you check your own credit report or when a lender pre-approves you without your explicit consent.
Pre-Approval and Credit Inquiries
When it comes to mortgage pre-approvals, most lenders perform a hard inquiry to assess your creditworthiness accurately. While this hard inquiry might have a temporary impact on your credit score, the impact is typically minimal. Generally, a single hard inquiry will only result in a small dip in your score, typically around five points or less. The credit bureaus understand that consumers may shop around for the best mortgage terms and account for this in their scoring models.
The Logic Behind Credit Scoring
Credit scoring models are designed to account for consumer behavior related to loans and credit applications. They recognize that it’s normal for individuals to shop around for the best rates and terms when seeking a mortgage. To encourage this behavior, credit scoring models treat multiple mortgage inquiries made within a certain time frame (usually 30 days) as a single inquiry. This means that even if you get pre-approved by multiple lenders within that timeframe, it will be considered a single inquiry when calculating your credit score.
While a pre-approval for a mortgage may result in a temporary dip in your credit score due to the hard inquiry, it’s generally a small and short-lived effect. The benefits of obtaining a pre-approval, such as understanding your budget and strengthening your position as a buyer, far outweigh any minor impact on your credit score.
To minimize any potential negative impact on your credit score during the mortgage pre-approval process, consider the following tips:
Do your research: Before applying for a pre-approval, research lenders and their qualification criteria. Focus on a select few lenders who are likely to meet your needs to minimize the number of credit inquiries.
Time your applications: If possible, try to complete all your mortgage pre-approval applications within a short time frame, such as 30 days. This way, the credit bureaus will consider them as a single inquiry.
Monitor your credit: Regularly monitor your credit report to ensure accuracy and identify any potential issues. You can obtain one free credit report per year from each of the three major credit bureaus.
In most cases, the impact of a mortgage pre-approval on your credit score is minimal and short-lived. While the initial hard inquiry may result in a small dip in your score, credit scoring models are designed to account for shopping around for the best mortgage terms. The long-term benefits of obtaining a pre-approval far outweigh any minor impact on
