Mortgage pre-approvals can drop your credit score by a few points because they involve the lender making a hard inquiry on your credit report. However, pre-approvals are an important part of the home-buying process, so you shouldn’t let that stop you from getting one.
What is a mortgage pre-approval?
A mortgage pre-approval is a letter from a lender that states the loan amount and interest rate you could receive if you move forward with a mortgage. Pre-approvals are important for a few different reasons. First, they give you a loan limit, or dollar amount you’d be approved to borrow, which you can use to guide your home search. Second, pre-approvals give you useful data about a potential mortgage, including interest rate and terms, which you can use to comparison shop. Third, pre-approvals show sellers that you’re a committed, qualified buyer with the funds to see the purchase through to closing.
You should get a mortgage pre-approval before you start home shopping, because this document helps you narrow down homes by purchase price and you’ll need it when it’s time to make an offer.
Mortgage pre-approval vs. prequalification
A mortgage pre-approval is different from a mortgage prequalification, even though they seem like the same thing.
With a mortgage prequalification, the lender gives you a rough idea of your interest rate based on the figures you give them. You don’t have to prove your income or debts to be prequalified by a lender and it won’t affect your credit score. A prequalification is essentially a rate quote, so it isn’t binding.
Compared to a prequalification, a mortgage pre-approval is a much more firm offer. You’ll provide documentation such as pay stubs, bank statements, or tax returns to back up your financial information, and the lender uses it to provide an estimate of your mortgage, including interest rates and terms.
While it’s not a guarantee you’ll be approved and that the loan will close, a pre-approval does give you a better idea of what kind of loan you’ll get. Keep in mind: Pre-approvals do impact your credit score.
How getting pre-approved impacts your credit score
There are two kinds of credit inquiries: hard inquiries and soft inquiries. Soft inquiries are like taking a quick peek at your credit score, and they don’t affect your credit. Hard inquiries, on the other hand, help your lender decide whether your credit history makes you a candidate for a loan. They do affect your credit score — although fortunately, not by much.
When offering a mortgage pre-approval, your lender will run a hard credit check. Hard inquiries like this show that you’re shopping for new credit, so they will knock your credit score down a few points.
“The typical credit score drop is less than 5 points for an experienced borrower with an average credit history,” said Dan Green, CEO of Homebuyer.com. A first-time homebuyer could experience as much as a 10-point drop, he said, but the tradeoff is an accurate picture of your potential home loan.
“Mortgage pre-approvals are dress rehearsals for the real thing, which is why home sellers don't accept offers to buy a home without one,” he said.
While hard inquiries will stay on your credit report for two years, the effect on your credit score drops off after 12 months.
Tip
To minimize the effect on your credit score, do all your mortgage rate shopping in a small time frame (think: 30 days or so). That shows you’re comparing offers, not seeking several new credit lines.
Step-by-step guide to get pre-approved
Getting pre-approved for a mortgage is relatively straightforward. You’ll apply with your lender of choice, provide the necessary information, and wait while your lender reviews your application. Here’s the step-by-step process:
- Check your credit report first. You can get a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion). Review it carefully to make sure everything is in order and there are no surprises or errors. If you find an error, report it immediately.
- Make sure your debt-to-income ratio (DTI) is within the preferred range. Your DTI shows your debts compared to your gross monthly income, and shows the lender how much “wiggle room” you have in your budget to take on additional debt. Lenders usually prefer a DTI of 35% to 50% (or less).
- The lender will ask you to submit financial documentation and will run a hard inquiry on your credit report to verify the information you provide. Make sure you have everything you’ll need: contact information, Social Security number (for you and your co-borrower, if you have one), employer information, bank account statements for checking, savings, and investment accounts (useful for down payment information), and W2s or tax returns.
- While you have your documentation handy, you can complete the mortgage pre-approval process for more than one lender. This will allow you to comparison shop, which is one of the best ways to save money on your mortgage.
Pre-approval credit score FAQ
What credit score is needed for pre-approval?
The credit score you need will depend on the lender and the loan program, but generally 620 will be the bottom limit. Of course, the higher your score, the better; most lenders reserve their best offers for people with good or excellent credit scores. Some loans, like Federal Housing Administration (FHA) loans, will allow a mortgage with a credit score as low as 500 as long as you can put 10% down.
How accurate is a mortgage pre-approval?
A mortgage pre-approval should be a pretty accurate estimate since the process verifies your financial information.
Is there a downside to getting pre-approved?
One drawback to mortgage pre-approvals is that your credit score may dip shortly afterward. However, this drop is usually small and short-lived.
“The knowledge you gain from becoming pre-approved and the potential risks you mitigate far outweigh the impact of a couple of points,” said Josh Kaplan, CEO at Closing Cost Help.
How long is a pre-approval good for?
Pre-approvals don’t last forever. You can expect it to be good for 90 days, although some lenders offer 30-day or 60-day pre-approvals instead. Your lender will include an expiration date on your pre-approval letter.
Where can I find my credit score?
You may be able to get your credit score from your credit card company; some companies include it on your statements, or provide a link within the mobile app. You can also buy access to your score from a service provider. For example, MyFICO sells credit scores you can see.
