If you’re thinking about buying a house, you’ve probably heard the term “credit score.” This 3-digit number tells a bank how likely it is that you can pay back your loans, and it’s based on things like the amount of debt you have, loans you’ve had in the past, and your repayment history. The higher your score, the more likely it is that a bank will lend you money.
You’ve earned your score by taking good care of your finances, so you want to be careful about anything that might take away from it. And one thing that can subtract points from your score is a credit inquiry.
“But wait!” you say. “Aren’t I supposed to get pre-approved for my mortgage before I start looking at houses? And doesn’t a pre-approval count as a credit inquiry?”
Good question, but when it comes to pre-approval, your credit score is safe. Here’s why.
Not all inquiries are alike
Soft inquiries just check to see what your credit score is. They don’t have anything to do with a loan or line of credit. For example, you might look up your own number just out of curiosity, or someone who’s considering hiring you might do so as part of a background check. Soft inquiries don’t affect your credit score at all. In fact, we recommend checking your credit score now so you can see where you stand and have a chance to correct any errors you may find. You can check your score at www.annualcreditreport.com. It’s fast, free, and easy.
- You check your own credit
- One of your current creditors checks your credit
- A company checks your credit to see if you qualify for preapproval offers
- You get a new job and your employer pulls your credit report as part of its screening process
Hard inquiries are different. With these, a lender is checking on your financial history to decide whether to give you a loan or line of credit and what kind of rates to charge you. If you’re looking for loans or lines of credit, it tells a lender that you’re thinking of taking on more debt, which can affect how much you’ll be able to pay back on your mortgage. That’s why these kinds of inquiries can subtract from your credit score—especially if you’re applying for a lot of loans at once.
- You go car shopping and apply for financing at the car dealership and they pull a credit report on you
- You get a preapproved credit card offer in the mail and respond to the offer
- You contact your credit card company and request a credit line increase. The company pulls a fresh credit report on you to help determine if they will grant the line increase.
How pre-approvals affect your credit
Pre-approvals are treated differently. First of all, your lender will check your credit score, with your permission, as part of the pre-approval process. Credit agencies understand that you need to shop for the best rate, especially when it comes to a big loan like a home mortgage and have come to expect rate shopping. Rather than count every mortgage credit pull against you, most scoring formulas treat all of these hard inquiries within a certain time period as one, big credit pull. Because of this unique situation, there’s a special rule that lets you apply for mortgage pre-approval at several lenders within a 45-day window. As long as your last request is 45 days or less after the first, all of your inquiries will only be counted once to avoid denting your credit score.
Should you get pre-approved?
If you’re getting close to buying a home, the answer is yes. To get pre-approved, you'll need to submit your financial information such as your income, outstanding debt, and credit history. Your lender then reviews this information to determine how likely you are to make your monthly mortgage payments and pay back the loan. Once you qualify for a mortgage, your lender will give you a letter stating how large of a loan it expects to offer you, as well as the interest rate and fees you can expect to pay on the loan.
A pre-approval gives you a good idea of how much house you can afford so you can look within the right price range. It shows sellers that you’re serious—and ready—to buy. And it helps you get all of your paperwork lined up, so once you’ve found the perfect home, you can be confident that you can get a mortgage and close on it much faster.
Just remember, if you’re shopping for pre-approvals or already started the mortgage process, this is not the time to apply for car loans, store credit cards, and other lines of credit. To protect your credit score, wait until you close on your new home first.
Want to get the ball rolling? An Ameritrust loan officer will be happy to help. We specialize in working with first-time buyers, and we can walk you through every step of the pre-approval process to make things easy.
Send us a message below and we'll be in touch!