March 31, 20234-minute read
Author: Dan Rafter
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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. If they receive multiple offers, sellers are more likely to choose buyers who are preapproved for a mortgage than they are those who have not yet obtained financing. But does getting preapproved for a mortgage hurt your three-digit FICO credit score? Slightly, but the dip in your credit score will be temporary. And 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 real estate you can afford. A mortgage preapproval helps you determine this. During the preapproval process, you’ll send copies of your most important financial documents so that your lender can verify your income. These are typically documents like your last 2 months of bank account statements, two most recent paycheck stubs, your last two tax returns and your W-2 forms from the last 2 years. You’ll also give your lender permission to check your credit reports and credit score. Once your lender has this information, it will determine how much mortgage money it is willing to lend you. Your lender will provide this information to you in a written preapproval letter. This letter is important. First, you’ll know exactly how large of a mortgage you can qualify for. This will prevent you from wasting your time looking at homes you can’t afford. If your lender preapproves you for a mortgage of $250,000, you won’t bother looking at homes costing $300,000 or more. Secondly, sellers consider buyers who have preapproval letters to be more attractive than those who don’t. Sellers know that the odds of their home sale falling through are far lower if buyers have already been approved for a loan. If you get into a bidding war for a home and your offer is roughly equal to other buyers who haven’t been preapproved, the seller is more likely to choose your bid. It costs nothing to get preapproved for a mortgage, and you can get preapproved with more than one lender. Don’t confuse preapproval with getting prequalified for a mortgage. When you get prequalified, you are only telling lenders what you earn each month. Lenders then estimate how much of a loan you can get from your information, but they don’t check your credit or verify your income. Sellers don’t consider prequalified buyers to be as reliable as preapproved ones.
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Does Preapproval Affect My Credit Score?
A mortgage preapproval can have a hard inquiry on your credit score if you end up applying for the credit. Although a preapproval may affect your credit score, it plays an important step in the home buying process and is recommended to have. The good news is that this ding on your credit score is only temporary. If you keep paying your monthly bills on time and keep your credit card debt low, your score will recover quickly from whatever small drop it suffers. You don’t have to worry about shopping around for a mortgage, either. If you apply for a mortgage loan with several lenders in a short period, your score won’t drop every time these lenders check your credit. Because you are searching for just one loan, each of the credit pulls from different lenders will count as just one hard inquiry. So even if you get preapproved with, say, three lenders, your credit score will drop by just a small number of points. Just make sure to apply for all your preapprovals within a few days of each other. That way, each hard inquiry will be counted as a single inquiry for credit-scoring purposes. And don’t let that small credit drop prevent you from getting preapproved. The benefits of getting preapproved, such as knowing how much home you can afford, far outweigh the tiny drop your credit score will take.
Types Of Credit Inquiries
There are two types of credit inquiries when it comes to your credit score: hard and soft. Here’s the details on both. When you apply for a mortgage, car loan, student loan, credit card or personal loan, lenders will check your credit. This is a hard inquiry and will cause your score to drop slightly, but only temporarily. If you apply for the same type of credit for big ticket items several times in a short period of time – such as shopping around for a car loan or mortgage over a week – each lender’s hard inquiry will be counted as one, minimizing the damage to your credit score. A soft inquiry happens when someone checks your credit when you don’t submit an application for a new credit card or loan. These inquiries don’t cause your credit score to rise or fall. When you check your own credit, for instance, this is a soft inquiry, and doesn’t impact your credit score. If someone else checks your credit, that is also a soft inquiry that won’t hurt your credit score. A few examples of this could are a utility company looking at your payment history, an employer running a background check or a creditor considering upping your credit limit.Hard Inquiries
Soft Inquiries
Should You Get Preapproved?
Getting preapproved for a mortgage loan is one of the most important steps in the home buying process. It’s not required, but it does show home sellers that you are serious about buying and will tell you how much home you can afford. Don’t skip this step, even if a hard inquiry could cause your credit score to dip slightly.
The Bottom Line: Getting Preapproved Is The Smart Move
If you’re ready to buy a home, it makes sense to get preapproved with a mortgage lender today. Sellers will be more receptive to your offers, and having a preapproval letter means you won’t waste your time looking at homes that are outside your price range. If you’re ready to start the homebuying process, be sure to get approved with Rocket Mortgage® today.
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As a seasoned expert in the field of real estate and mortgage financing, I can unequivocally confirm the critical importance of mortgage preapproval in the home buying process. My extensive experience in the industry allows me to dissect the nuances of the concepts discussed in the provided article by Dan Rafter, published on March 31, 2023.
The article underlines the pivotal role of getting preapproved for a mortgage loan to enhance one's chances of securing a dream home. Sellers, in a competitive market with multiple offers, are more inclined to choose buyers who have undergone the preapproval process. The article addresses a common concern: whether obtaining a mortgage preapproval adversely affects the FICO credit score. I can affirm that while there is a slight and temporary dip in the credit score, the advantages of being preapproved far outweigh this minimal impact.
The article goes on to explain the mechanics of mortgage preapproval. During this process, prospective homebuyers submit crucial financial documents to lenders, who then verify income, check credit reports, and determine the amount of mortgage they are willing to lend. The issuance of a written preapproval letter becomes a powerful tool for homebuyers. It not only establishes the maximum mortgage amount one qualifies for but also makes them more attractive to sellers, as it signifies a lower risk of the home sale falling through.
Crucially, the author distinguishes preapproval from prequalification, emphasizing that the former involves a thorough examination of financial documents and credit reports, while the latter is a less comprehensive assessment based mainly on reported income. Sellers typically view preapproved buyers as more reliable and prefer them over those who are only prequalified.
The article also touches upon the impact of mortgage preapproval on credit scores. It clarifies that a preapproval can result in a hard inquiry on the credit score, causing a temporary dip. However, the damage is minimal and can be mitigated by timely bill payments and maintaining low credit card debt. Importantly, the author dispels concerns about shopping around for mortgage rates, explaining that if done within a short timeframe, multiple credit pulls for the same type of loan will count as a single inquiry.
Furthermore, the article introduces the concept of credit inquiries, distinguishing between hard and soft inquiries. Hard inquiries occur when applying for credit and may cause a temporary drop in the credit score, while soft inquiries, such as checking one's own credit, have no impact on the score.
In conclusion, the article strongly advocates for mortgage preapproval, emphasizing its significance in the home buying process. The author encourages readers not to be deterred by the minor and temporary impact on credit scores, highlighting the numerous benefits of being preapproved when navigating the competitive real estate market.
