Mortgage

Will a Mortgage Preapproval Hurt My Credit Scores?

Seeking mortgage preapproval before shopping for a home can save time and give you an edge over rival buyers who haven't done so. But because it is essentially the same as a loan application, the preapproval process triggers a credit check that can reduce your credit score by a few points.

What Is Mortgage Preapproval?

Mortgage preapproval—not to be confused with mortgage prequalification—entails a detailed review of your finances by a loan officer at a bank or other lending institution. Based on information you supply about your income, outstanding debt, credit history and ability to make a down payment, preapproval determines how large a loan the lender expects to offer you and the interest rate and fees you can expect to pay on that loan.

Preapproval doesn't guarantee you'll get a loan, but it means you've been subjected to most of the financial scrutiny required for approval, and it's as close as you can get to full approval without designating a specific property you want to buy.

When you're preapproved for a mortgage, the lender gives you a letter detailing its willingness to issue you a loan, and the terms of that loan. A potential buyer with a preapproval letter may have a leg up over others who lack preapproval and therefore aren't as equipped to prove they can finance the purchase.

How Mortgage Preapproval Affects Your Credit

As part of the mortgage preapproval process, you must authorize the lender to review your credit report from one or more of the three national credit bureaus (Experian, TransUnion or Equifax), and allow them to obtain credit scores based on those reports.

When the lender requests those credit checks, a notation known as a hard inquiry appears on your credit report. Because hard inquiries are associated with the acquisition of new debt, they can cause your credit credit scores as calculated by the FICO® Score and VantageScore® scoring models to dip. This score reduction is usually short-lived, and the inquiry will drop off your credit report completely after two years.

How to Get Your Credit Ready for a Mortgage

Review your credit profile before you seek a mortgage or mortgage preapproval and, if needed, take steps to improve your credit before the lender checks it. Ideally you should begin this process at least a year before you start house hunting, but even a few months of focused activity can help you spruce up your score.

You can take the following steps to help get your credit ready for the mortgage process:

If you plan ahead and spruce up your credit score beforehand, you can increase the likelihood of mortgage preapproval, minimize the impact of the modest credit score reduction that comes with the preapproval process and embark on your quest for a home well-equipped for success.