For prospective homebuyers, the process of securing a mortgage often begins with obtaining preapproval from a lender. However, there’s a common misconception that getting preapproved for a mortgage can negatively impact one’s credit score. In this article, we’ll delve into the truth behind this notion and explore whether getting preapproved hurts your credit.
Understanding Preapproval:
Before diving into the potential effects on credit scores, it’s essential to understand what preapproval entails. Preapproval involves a lender evaluating a borrower’s financial information to determine the maximum amount they are qualified to borrow for a mortgage. This process typically involves a thorough review of the borrower’s credit history, income, assets, and debts.
Soft vs. Hard Credit Inquiries:
When a lender evaluates your credit history for preapproval, they may perform either a soft inquiry or a hard inquiry. It’s crucial to distinguish between the two:
1. Soft Inquiry: A soft inquiry, also known as a soft pull, occurs when a lender or individual checks your credit report for informational purposes. Soft inquiries do not affect your credit score and are commonly used for preapproval processes.
2. Hard Inquiry: A hard inquiry, or hard pull, occurs when a lender reviews your credit report as part of a formal application for credit, such as applying for a mortgage or credit card. Hard inquiries can impact your credit score, albeit typically by a small amount and temporarily.
The Impact of Preapproval on Credit Scores:
Contrary to popular belief, getting preapproved for a mortgage generally does not have a significant impact on your credit score. Here’s why:
1. Soft Inquiries for Preapproval: Most lenders use soft inquiries to assess a borrower’s creditworthiness during the preapproval process. Since soft inquiries do not affect credit scores, obtaining preapproval is unlikely to have a negative impact on your credit.
2. Minimal Impact of Hard Inquiries: Even if a lender conducts a hard inquiry for preapproval, the impact on your credit score is typically minimal and short-lived. According to credit scoring models, multiple inquiries for the same type of credit within a short period (such as 14-45 days) are often treated as a single inquiry to minimize the impact on credit scores.
Benefits of Preapproval:
Despite the negligible impact on credit scores, the benefits of obtaining preapproval for a mortgage are substantial:
1. Know Your Budget: Preapproval gives you a clear understanding of how much you can afford to borrow, helping you narrow down your home search and avoid looking at properties outside your budget.
2. Competitive Advantage: Sellers often favor offers from preapproved buyers, as it demonstrates financial readiness and increases the likelihood of a smooth and successful transaction.
3. Streamlined Process: With preapproval in hand, you can expedite the mortgage application process once you find the right property, potentially shortening the time to closing.
Contrary to popular belief, getting preapproved for a mortgage is unlikely to have a significant impact on your credit score. Whether through soft inquiries or minimal effects of hard inquiries, the preapproval process is designed to help you understand your borrowing capacity without damaging your credit. As such, prospective homebuyers should feel confident in seeking preapproval as a valuable step toward homeownership, knowing that it’s a smart financial move with minimal downside risk to credit scores.
