Key takeaways
- Getting preapproved for a mortgage requires a hard credit pull, which can lower your credit score.
- However, the drop in score is fairly minimal and only temporary.
- For most people, the benefits of preapproval outweigh this drawback.
If you are a serious house-hunter, getting preapproved for a mortgage early in the process can help your chances of having your home offer accepted. A mortgage preapproval is a document from a lender indicating how much money that lender would allow you to borrow to purchase a home.
Mortgage preapproval demonstrates that you have the financial means to afford a purchase, which can give you a leg up on other buyers you’re competing with. Since it tells you how much you’ll likely be able to borrow, it’s also useful as an indicator of how much house you can ultimately afford.
Before applying for preapproval, though, it’s important to understand how the process works, how it’s different from prequalification and how your credit will be impacted. Let’s take a look.
How does mortgage preapproval work?
A preapproval letter serves as proof that the lender is ready to proceed with your financing — provided the residence meets particular criteria and your financial status doesn’t change dramatically since you received the preapproval.
To get preapproved for a mortgage loan, you simply complete an application and submit the necessary documentation asked for. This can include your employment history, liabilities and assets, tax returns and more.
“Once preapproved, the buyer will know the amount they can borrow and have a really good idea of what their maximum monthly payment will be,” says Katrina Lucisano, a mortgage loan originator for Silverton Mortgage in Lawrenceville, Georgia.
Preapproval vs. prequalification
It’s easy to get preapproval confused with another common term, “prequalification.” A mortgage loan prequalification simply provides a ballpark estimate of how much you may be able to borrow after answering a few simple questions.
“Prequalification is the lowest level of approval,” says Mason Whitehead, a Dallas-based branch manager for Churchill Mortgage. “This means the lender has checked your credit report and had a conversation with you about your income, but nothing has been verified yet.”
Getting prequalified does not involve any actual underwriting, and it’s not as meaningful as getting preapproved. A preapproval letter puts you in a much stronger position as a buyer, though even that should not be confused with official approval.
How does mortgage preapproval affect your credit?
There’s one catch involved in getting a mortgage preapproval: It can lower your credit score. The reason is that a preapproval requires a hard credit pull, which shows up as a hard credit inquiry on credit reports from Experian, TransUnion and Equifax. The decrease is only temporary, however.
Hard vs. soft credit pull
When you authorize a creditor, lender or financial institution to pull your credit report to check your credit history and score — as is the case with a mortgage preapproval — this is known as a hard pull or hard inquiry. A hard inquiry can lower your credit score by as much as 10 points, although the drop likely won’t be that significant. According to FICO, for most people a credit inquiry will take less than five points off their FICO score.
A soft credit pull, on the other hand, doesn’t generate a hard inquiry. This can happen, for example, when a credit card company sends you a preapproved offer. “They do this to review your credit report and score and get a sense of how well you manage your credit,” says Lyle Solomon, principal attorney at Oak View Law Group in Rocklin, California. “Fortunately, a soft pull does not affect your credit score.” Checking your own credit score is also considered a soft inquiry.
How long your credit will be affected
A hard inquiry from a preapproval will stay visible on your credit reports for two years, according to FICO. However, since FICO considers only the previous 12 months of inquiries to determine your score, the drop in your credit score should only last for one year.
Don’t let the temporary score drop prevent you from shopping around when getting preapproved, though. Multiple hard checks during the same period from mortgage lenders are usually counted as a single inquiry, as long as they are done within a relatively short span of time.
What credit score do you need to buy a house?
A credit score of 620 or higher is typically required when applying for a conventional mortgage loan. Lucisano cautions that if your score is below 620, it may be more difficult to get approved by a lender.
Government-backed loans, however, have different requirements. For example, for FHA loans, you’ll need a credit score of at least 580 with a 3.5 percent down payment or at least 500 with a 10 percent down payment. VA loans technically have no required minimum credit score, although most mortgage lenders will want to see a score above 620. There’s generally no credit score requirement for a USDA loan, either, but USDA-approved lenders usually want to see at least 640.
Bottom line
As a house-hunter, getting a mortgage preapproval can put you ahead of the game, showing sellers that you are financially solid and your offer should be taken seriously. And while doing so will temporarily lower your credit score, those benefits outweigh the risk — especially since you can improve your score relatively quickly by remaining financially responsible, paying your bills on time and not applying for other types of credit.
