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August 20, 2023 • General

Understanding the Impact of Loan Pre-Approval on Your Credit Score

The journey to homeownership often starts with obtaining a mortgage pre-approval—an essential step that helps you understand your budget and enhances your credibility as a buyer. However, it’s natural to wonder whether this process might have any impact on your credit score. Let’s delve into the relationship between loan pre-approval and your credit score to dispel any concerns.

The Pre-Approval Process:

Obtaining a mortgage pre-approval involves having a lender evaluate your financial situation, credit history, and other relevant factors to determine the loan amount you qualify for. This pre-approval is not a commitment to lend but rather an estimate of the loan you’re likely to secure based on the information provided.

Soft vs. Hard Credit Inquiries:

Credit inquiries fall into two categories: soft and hard inquiries.

1. Soft Inquiries: These occur when you check your own credit report or when a lender checks your credit for informational purposes. Soft inquiries do not impact your credit score.

2. Hard Inquiries: When you apply for credit, such as a mortgage, credit card, or auto loan, the lender performs a hard inquiry to assess your creditworthiness. Hard inquiries can have a minor impact on your credit score, typically causing a small decrease.

Pre-Approval and Credit Impact:

Obtaining a mortgage pre-approval generally involves a hard credit inquiry. This means that your credit score may experience a slight dip as a result of the inquiry. The decrease is usually minimal and temporary, lasting only a few months. Over time, the impact fades away, especially if you continue to maintain responsible credit behavior.

Managing the Impact:

While the impact of a single hard inquiry is usually minimal, there are steps you can take to minimize its effect on your credit score:

1. Shop Smart: If you’re shopping for mortgage pre-approvals, do so within a relatively short time frame. Credit scoring models typically treat multiple inquiries for the same type of credit (like mortgages) made within a short period (around 14-45 days) as a single inquiry.

2. Maintain Good Credit Habits: Focus on consistently paying bills on time, keeping credit card balances low, and avoiding opening new lines of credit unnecessarily. These habits can help offset any temporary decrease in your credit score.

Final Takeaway:

While a mortgage pre-approval does involve a hard credit inquiry, the impact on your credit score is generally minor and temporary. The importance of securing a pre-approval, which empowers you with a clear understanding of your budget and strengthens your position as a serious buyer, far outweighs any temporary dip in your credit score. By maintaining responsible credit behavior, you can easily manage and recover from any small decrease caused by the pre-approval process.

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