When you seek mortgage preapproval, it’s common for borrowers to worry about the potential drop in their credit scores. It’s important to note that while there is indeed a minor impact, the decline is usually manageable. Typically, a mortgage preapproval application results in a credit score reduction of about three to five points. For most borrowers, this slight drop is unlikely to hinder loan approval or lead to an increased interest rate. In fact, shopping around for preapproval with multiple lenders may save significant amounts over time—up to $1,200 annually—proving that the benefits often outweigh the temporary credit hit.
Understanding the distinction between mortgage preapproval and prequalification is crucial as they are often confused, but serve different purposes in the home-buying process. Preapproval provides a much clearer and confirmed estimate of how much a lender is likely to offer and at what interest rate. This contrasts with prequalification, which relies on self-reported financial information from the borrower and does not require extensive verification. The mortgage preapproval process involves submitting an application and required documents, such as W2s and tax returns, followed by a thorough review of your credit and financial situation by the lender. If approved, you receive a preapproval letter that typically lasts between 30 to 90 days before needing reevaluation.
It’s essential to recognize how a mortgage preapproval affects your credit score. These applications result in hard inquiries to your credit report, which are recorded and can lower your score. However, these inquiries only impact your credit score for one year, and the potential long-term negative effects of poor credit management, like missed payments, vastly outweigh the brief dip caused by mortgage evaluations. Since you have different credit scores from the three major bureaus—Equifax, TransUnion, and Experian—the overall effect of preapproval should be consistent across these scores, reflecting your creditworthiness.
To minimize credit score damage from obtaining preapprovals, potential homebuyers can take several proactive steps to maintain their scores. One key strategy is to start with prequalification offers instead of jumping straight to preapproval applications. Prequalification generally involves a soft inquiry that doesn’t affect credit scores, allowing individuals to assess multiple lenders without immediate repercussions on their credit. This approach also facilitates effective comparison of prequalification offers, which can vary widely, enabling borrowers to secure the best overall terms for their potential mortgages.
Smart timing is another effective strategy when it comes to submitting preapproval applications. Utilizing a “rate-shopping window” allows borrowers to apply for preapprovals from various lenders within a 30-day period without incurring multiple hard inquiries. During this timeframe, lenders regard these multiple applications as a single inquiry, helping to limit the overall impact on a borrower’s credit score to just a few points. This approach encourages borrowers to seek competitive rates while managing their credit health effectively.
In conclusion, it is advisable for homebuyers to pursue multiple mortgage preapprovals to ensure they find the best loan conditions available. While there is no definitive number of applications that are ideal, obtaining preapprovals from four or more lenders can enhance savings significantly, especially when market rates are elevated. A credit score of 620 or above is typically needed for most mortgages, though several types of loans may accommodate lower scores under specific conditions. Therefore, engaging in the preapproval process can empower borrowers, arming them with necessary insights and financial backing during their home-buying journey.
