A mortgage pre-approval involves a thorough evaluation of one’s finances by a financial institution, like a bank or credit union. It is used to determine what kind of mortgage a borrower can get, if any, with a given lender. It will also help determine the fees and interest rate you would pay if you were to take on the mortgage with the lender you got pre-approved for.
A loan officer may review your finances to gauge your ability to put down a sufficient down payment. They will look at your credit score, credit history, income, bank statements and other pertinent details of your finances. It is also used to ascertain how large a loan the bank expects to offer the applicant.
The information they collect and evaluate will allow them to provide you with an estimate of the loan amount you would receive from their bank or comparable lending institution. Mortgage pre-approval will determine whether or not you qualify for the mortgage loan in question.
The difference between mortgage pre-qualification and a mortgage pre-approval is that a mortgage pre-approval involves an in-depth credit analysis. A mortgage pre-qualification usually consists of no documentation whatsoever.
Here we are going to explore the effects mortgage pre-approval has on your credit score.
How does mortgage pre-approval affect your credit?
Your credit score is impacted by a wide range of factors. One of these factors is a credit inquiry or credit check. Whenever someone approaches a lender for funds, the lender will check their credit score and history to gauge the person’s financial status and capabilities.
There are two types of credit checks; soft inquiries and hard inquires.
When someone’s credit is checked, then it is known as a soft inquiry. Soft inquiries tend to be part of a self-credit check by the borrower themselves or part of an employment screening. With soft inquiries, your credit score will not be impacted.
A hard inquiry is run by a creditor before they lend you money or draft documents to do so. In addition to your credit score, your default and repayment history will also be assessed. Your credit usage rate may also be evaluated. Hard inquiries require your consent in order to take place. They may remain on your record for up to two years before they are removed.
Is mortgage pre-approval a hard inquiry?
If you apply for mortgage pre-approval, your lender will thoroughly check your credit and a hard inquiry will be created. This will negatively impact your credit score.
Hard inquiries are often connected to acquiring a new loan. Getting mortgage pre-approval will incur a hard inquiry on your credit report, as you must submit a mortgage loan application during the process. However, the impact on your score is usually quite small and most borrowers will notice that their credit score has rebounded nicely after just a few months.
How to Get Your Credit Ready for a Mortgage Pre-Approval
Most lenders will assume that a borrower with a higher credit score is more reliable and trustworthy. Thus, the higher you can get your credit score before applying for a loan, the better chance you will have of getting approved, getting a higher loan amount with the loan and/or a lower interest rate.
Moreover, your regular income and the amount of debt that you have will have an impact on your current credit score. The rates and terms of your loan will be determined in part by your debt-to-income ratio.
As you pay down your debts, you will be showing your lender that you can manage your money wisely and make financial commitments. The more debt you pay back over time, the higher your score will be. You should also try to not use more than a third of your available credit at any one time. Budgeting can help you make sure you don’t use too much of your available credit, and increasing your credit limit will decrease your overall credit utilization.
The result is your credit score will go up. You may also want to look into a credit builder loan. It may diversify your credit history, which can cause an uptick in your credit score.
Another benefit is that taking on a credit-builder loan is that it will show your lender that you can handle more than simple credit cards. You also need to make all payments in a timely and reliable manner. This demonstrates that you can be a reliable borrower.
It is important to remember that each time you apply for mortgage pre-approval a hard inquiry is created, which hurts your credit score. Make sure you do your research first, and pick a few lenders you would like to get pre-approved for, and apply to them within a short period of time to limit the damage done to your credit. Mortgage pre-approval has many benefits, but you need to make sure that you can get your credit ready for a mortgage pre-approval and the mortgage itself if you qualify.
Closing Thoughts
Buying a home will likely be the biggest investment you will ever make. If you want a better understanding of what kind of mortgage you can get, then a pre-approval mortgage will help.
It will help you determine what kind of homes you can buy, which will help your search for your next dream home. You understand how much you qualify for as well as the interest and other fees you can expect to pay.
Getting pre-approved for a mortgage will also help give you a leg up over other prospective buyers in the area while saving you money and time down the line when you are ready to place an offer on a home.
Mortgage pre-approval involves a hard inquiry that cannot be avoided. However, the impact it has on your credit score is temporary and the clarity it provides is vital when looking to purchase a home.