Does mortgage pre-approval impact credit?

Unless you have millions of dollars stashed somewhere, you must secure a mortgage first if you want to buy a house in the United States. With this, you will need to apply for a home loan from commercial banks or other lending companies and deal with their mortgage application process.

Most, if not all the time, you should get pre-approval as part of the initial step. This is where a mortgage provider will pull your credit report and review your financial documents to let you have an estimate of the amount that you can borrow.

The question is: does mortgage pre-approval impact credit scores?

In this article, Mortgage Professional America will answer this question and help you learn about this mortgage application step. We will shed light on how mortgage pre-approval works and how you can get one as a home loan applicant. Want to understand the difference between pre-approval and pre-qualification? What about a hard credit and a soft credit check? Read on below.

To professionals from the mortgage industry who are our usual pool of readers, this is another one of our client education pieces. What does this mean for you and your prospects? We’ve made this primarily to help your clients who might be interested in knowing whether mortgage pre-approval does impact credit scores or not. Feel free to share this with them!

Does mortgage pre-approval impact credit?

Yes – mortgage pre-approval can hurt your credit scores. However, it is temporary and largely depends on which type of credit check your mortgage lender does.

Watch this video to learn why mortgage pre-approval impacts credit scores in a negative way:

To learn all that you need to know about credit scores when purchasing a house, check out this article.

How much does a mortgage pre-approval impact your credit score?

Usually, a mortgage pre-approval will decrease your credit score by a few points. However, it is only for a short period. Your credit score will go back to normal afterwards.

How does mortgage pre-approval work?

Mortgage pre-approval is when a mortgage lender verifies your financial information to approve you for a mortgage loan. Prior to shopping for properties, you should always contact a mortgage lender to get an idea of the loan amount you will qualify for. Here are some details about you that home loan providers will collect to conduct mortgage pre-approval:

1. identification
2. proof of employment
3. evidence of income
4. proof of assets and investments
5. other loan obligations

Here is a deeper look at each information needed by mortgage lenders to conduct a pre-approval:

1. Identification

As a first step, a commercial bank or mortgage lender will ask for your identity. This is required to conduct checks on your credit standing and verify if you are the person you claim to be. You can prove your identity by providing a valid identification card or document such as:

• passport
• driver's license
• Social Security number

2. Proof of employment

After verifying your identity, you need to provide evidence of your employment. This is to show the bank or mortgage lender that you have the means to pay your mortgage if you get approved.

3. Evidence of income

You should also show proof of income to the mortgage lender which will conduct the pre-approval. This is to establish your financial capacity. You can confirm your income by giving them pay slips or tax returns.

4. Proof of assets and investments

Your home loan provider might also ask for additional documents to verify if you have assets and other investments. They can make an inquiry if you have savings to determine how much you can prepare for the deposit.

5. Other loan obligations

Finally, mortgage lenders will ask about your other loan obligations. This is critical when reviewing your financial standing since this can greatly impact your chances of getting approved for a home loan.

Estimated costs after getting pre-approved

Throughout the mortgage pre-approval process, a mortgage expert reviews your financial information to decide what home loan you are eligible for. They will also provide you with a variety of mortgage options before giving you a detailed estimate. That information typically includes the following:

• your monthly mortgage payment
• your interest rate
• closing costs

To understand what closing costs are and how they are estimated, read this article.

How to get mortgage pre-approval

A smart way to think about mortgage pre-approval is that it is an introduction for securing an actual mortgage. To get pre-approved by your mortgage lender, you must provide them with details about your finances through selected documents. Once they are satisfied with the financial information they received, your lender will evaluate your financial standing to give you an estimate of:

• the amount that you can borrow
• the home loan term and down payment amount
• the interest rate that your mortgage will have

Looking for credible mortgage lenders to get approved Best in Mortgage page to find the right home loan provider for your mortgage needs. You can also look for the best mortgage brokers there if you haven’t hired one yet! 

Mortgage pre-approval gives estimated interest rates

The financial information that the mortgage expert reviews during the pre-approval process will be used to determine the interest rate you qualify for and the mortgage amount. The information that is typically reviewed will be your:

• credit history
• credit score
• pay stubs
• tax returns
• monthly debt payments
• bank statements
• housing payment history

Usually, your mortgage pre-approval will be good for up to 20 to 90 days (can be stretched to 120 days for some lenders). The interest rate and mortgage the expert gives to you will also provide a reliable feature to work with when you are searching for properties. It will also allow you to budget for your mortgage payments and figure out the highest property value you will be able to afford.

What is the difference between pre-approval and pre-qualification?

Pre-approval uses verified information to approve you for a home loan. On the contrary, pre-qualification does not. Rather than using verified information, pre-qualification uses an estimate.

Mortgage pre-qualification

Mortgage pre-qualification estimates your budget at one time and is quoted using a self-attested estimate. It also uses answered questions on your financial situation and is a self-reported credit score.

In other words, pre-qualification uses a non-verified estimate of the kind of home loan you will qualify for. It also gives you a rough calculation of the interest rate that you will end up paying on your mortgage.

Mortgage pre-approval

Mortgage pre-approval is the part of the home loan application process where your mortgage lender will verify your financial details. They will conduct this to give you estimated figures crucial to the mortgage. It is the step that ends with you receiving formal documentation confirming the interest rate and mortgage size that you can get from your mortgage lender.

Pre-approval also gives a written commitment of your mortgage affordability. It’s quoted using verified information and documents detailing your financial situation. It is also done via hard credit inquiry.

To better understand the difference between pre-qualification and pre-approval, watch this clip below:

Are you buying a house for the first-time? You need to know this mortgage pre-approval advice for new home buyers.

Two ways to check your credit score

Here are the two ways to check your credit during mortgage pre-approval:

1. Soft credit check

Essentially, you are the only one who would see a soft credit check. It is not seen by mortgage lenders, and it has no impact on your credit score. Lending companies will use soft credit checks when deciding if they should pre-approve you for a credit card. A new mortgage lender can also use a soft credit check if your current lender pulls a credit report for an account review.

The same is true when a debt collector reviews a recent credit report. Checking your own credit rating will also get logged as a soft credit check.

2. Hard credit check

A hard credit check indicates that a mortgage lender is going to review your financial standing thoroughly. As such, it can impact your credit score, lowering it by a few points. Commercial banks and other loan providers use a hard credit check when you want to borrow a big amount of money.

Lending companies can also do a hard credit check if you want to take on added debt. Any hard pulls on your credit standing will show up when other potential loan providers conduct credit checks on you. This can temporarily affect your credit score. However, any negative impact will likely happen only if you take out numerous hard credit checks.

How long does a hard inquiry stay on your credit report? Do its effects linger for a long time? Learn all about hard pulls on your credit score in this video:

Is mortgage pre-approval a hard pull?

As a general rule, the answer is yes. Mortgage pre-approval is a hard pull or a hard credit check on home loan applicants. It involves mortgage lenders looking thoroughly at detailed information about your debt and financial standing. These lenders will take out a hard credit check on you during pre-approval since this is a standard step in the mortgage approval process.

Hard credit checks are required almost all the time because mortgage lenders need to evaluate whether you can shoulder your mortgage repayments if you get approved.

Navigating the impact of mortgage pre-approval on credit

Even if mortgage pre-approval does impact your credit score, you should not worry too much since it is not permanent. Your credit score will still return to the way it was after several days.

You can think about the negative effects of mortgage pre-approval as a small price to pay in achieving your homeownership goals. And once you secure a mortgage and buy your dream home, it won’t matter as much.

What are your thoughts on how mortgage pre-approval impacts credit score? Feel free to comment your insights on the space provided below.