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    Home»Pre-Approval»How a Mortgage Pre-Approval Affects Your Credit
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    How a Mortgage Pre-Approval Affects Your Credit

    Tech AdminBy Tech AdminFebruary 20, 2018No Comments4 Mins Read
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    Getting a pre-approval for a mortgage before shopping for a home is a smart move. Sellers and realtors will take you more seriously. They know you have gone to a lender and that the lender is willing to lend you money based on specific conditions. Without this simple letter, some sellers or realtors just won’t talk to you.

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    You worry that getting pre-approved will hurt your credit though. Doesn’t every inquiry put a ding on your credit history?

    While it’s true, your score does drop every time there is an inquiry, it’s not by much. Usually you will lose a few points. It’s nothing that will make or break your credit in the future.

    Shopping Around

    Now what happens if you want to shop around with different lenders? You know there are other offers out there and you want to see who offers the lowest rate and/or closing costs. But, with each application you submit, you will have to agree to have your credit pulled. Isn’t that going to be bad for your score?

    Luckily, the major credit bureaus recognize that many people do shop around. They usually cut you some slack when this happens, but only under certain circumstances. You have to do your shopping within a short period. Usually 3-4 weeks is the maximum that a credit bureau will consider your inquiries as a way to shop around.

    Why Lenders Care About Inquiries

    You might wonder what the big deal is to lenders and/or credit bureaus. Why do they care that you have inquires on your credit report? To them it means a potential new loan. If you have multiple new inquiries and they are not all from mortgage lenders, it could be a red flag.

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    Let’s say you suddenly have inquiries for several installment loans and credit cards. A lender may wonder what is going on in your financial life. Are you in some type of crisis and are frantically trying to find money? If so, they will not want to fund a new mortgage in your name. They will need to know beyond a reasonable doubt that you do not have any new loans outstanding.

    Oftentimes it can take a few months for loans to start showing up on your credit report. This is why lenders pay such close attention to your inquiries. If they see that there could be new potential loans out there, they may not want to lend to you.

    How a Pre-Approval Helps You

    The fact that a pre-approval knocks your credit score down a few points should not be a big deal. It’s not going to hurt you in the long run. What would hurt you though, is not shopping around for a mortgage. You want to know what other options you have. Just taking the first mortgage that is offered to you could have you paying too much in interest and/or fees.

    Getting the pre-approval also gives you an idea of what you can afford. Do you go shopping for a car before knowing how much money you can afford on your car payment? The same should be true for your mortgage, except it is much more entailed. Let a lender show you what your full payment will look like based on what he can preapprove you for, then you can decide how it works into your budget.

    When you have a pre-approval in hand, you can then shop for homes that are within your budget. Without the pre-approval, it’s like shopping for a car that is way outside of your budget. Let’s say you have a budget for a Hyundai, but you are looking at Mercedes Benz cars. You know you can’t buy a Mercedes, but yet you spend your time looking at them. The same is true for houses. You don’t want to start looking at them until you know what you can truly afford.

    Your credit score will take a hit when you get the pre-approval and again when you get the loan. But, with on-time payments, your mortgage will actually help your score in the long run. Take your time when shopping for a mortgage and find the best deal for you, leaving the worries of your credit score behind.

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