How much mortgage preapproval affects credit score

Quick insights

• Mortgage preapproval involves a hard credit inquiry, which may lower your score by a few points, but the effect is temporary.
• Mortgage preapproval offers various benefits, such as making your offer more competitive and leading to a faster closing.
• Multiple mortgage preapproval inquiries within a short period (typically a 45-day window) are usually counted as a single inquiry, reducing the negative impact on your credit score.ec-mortgage-lender-checks

While preapproval does involve a credit check, its impact on your credit score is usually small and temporary. In this article, we’ll break down how mortgage preapproval works and what effect it can have on your credit score.

How does mortgage preapproval work?

Mortgage preapproval is a loan provider ’s way of determining how much you can borrow before you start house hunting. It involves a thorough review of your finances to ensure you’re a qualified borrower. Here’s how the process typically works:

• Application submission: You provide personal, financial and employment information to a lender.
• Credit check: The loan provider performs a hard inquiry on your credit report to assess your creditworthiness.
• Income and debt review: The mortgage provider evaluates your income, assets and debt-to-income (DTI) ratio to determine how much you can afford.
• Preapproval letter issuance: If approved, you’ll receive a preapproval letter stating the loan amount you qualify for, which could help position you as a competitive homebuyer.

Financial documents required for mortgage preapproval

When applying for mortgage preapproval, loan providers require several financial documents to assess your ability to repay the loan. Here’s what you could need to have ready:

• Proof of income: Recent pay stubs, W-2s or tax returns.
• Tax returns: Personal tax returns and business tax returns (if you’re self-employed and own a business) from the last two years.
• Bank statements: Statements from the past 2-3 months.
• Employment verification: A letter from your employer or recent pay stubs.
• Credit report authorization: Mortgage providers pull your credit to assess your history.
• Debt information: Details on existing loans, credit cards and obligations.
• Asset statements: Documentation of savings, investments or real estate.

Does preapproval affect your credit score?

Yes, mortgage preapproval can impact your credit score, but the effect is usually minor and temporary. When a lender reviews your application, they perform a hard credit inquiry to check your credit history and assess your financial health. Hard inquiries can slightly lower your credit score, but the impact is generally small.

Here’s what to expect from mortgage preapproval:

• Minimal impact on your score: A single hard inquiry has a minor effect, usually lowering your score by just a few points.
• Rate shopping shouldn’t hurt you: If you apply for multiple mortgage preapprovals within a short period (typically 14-45 days, depending on the credit scoring model), they are usually treated as a single inquiry. This can help minimize any negative impact.
• Temporary dip, quick recovery: Any slight drop in your score typically rebounds within a few months, especially if you continue making on-time payments on your existing debts.
• Positive long-term impact: Once you secure a mortgage and make consistent, on-time payments, your credit score can improve over a period of time.
• Soft inquiries for prequalification: Unlike preapproval, mortgage prequalification often involves only a soft credit inquiry, which does not affect your credit score.

Hard vs. soft credit pull

A “pull” is another term for “inquiry.” When a mortgage provider checks your credit, they perform either a hard or soft credit inquiry, depending on the purpose. A hard pull is when a lender reviews your credit to make a lending decision, which can slightly lower your credit score. A soft pull is when a company or individual checks your credit for informational purposes, such as a background check, which does not affect your credit score.

The benefits of mortgage preapproval

Despite the minor impact on your credit score, mortgage preapproval offers several potential benefits:

• Know your budget: Helps you determine how much you can afford before house hunting.
• Stronger offers: Shows sellers you’re a serious buyer, making your offer more competitive.
• Better rate shopping: Allows you to compare loan options from multiple lenders without significantly hurting your credit.
• Potentially faster closing process: Since much of the financial vetting has been completed, the closing process may move at quicker pace.
• Identifies potential issues: Uncovers credit or financial concerns early, giving you time to address them before making an offer.
• Negotiation power: Sellers and real estate agents may be more willing to negotiate with a preapproved homebuyer.

You might find that the potential benefits of mortgage preapproval offset the impact on your credit score.

Preapproval vs. prequalification

While both preapproval and prequalification can help you understand your mortgage options, they serve different purposes. Prequalification gives you a rough estimate of what you might qualify for, while preapproval is a more detailed process that provides a clearer picture of your borrowing power. Chase does not offer mortgage prequalification.

In summary

Mortgage preapproval is a valuable step for homebuyers, providing a clear budget and good position to act when you find the right home. While a preapproval may cause a slight dip in your credit score, the potential benefits typically outweigh that drawback. With the right preparation, you can navigate the process smoothly and move closer to owning your dream home.