Do Multiple Mortgage Pre Approvals Affect Credit Score

Do multiple mortgage pre-approvals affect credit score? Yes, they can impact your credit score, but not as negatively as you might think. When you apply for multiple pre-approvals within a 45-day window, it typically counts as a single inquiry on your credit report. This means your score might drop by about 5 points temporarily, but it often rebounds quickly. So, if you’re shopping around for the best mortgage rates, you can do so without severely damaging your credit.

Understanding Credit Scores and Inquiries

What is a Credit Score?

Your credit score is a three-digit number that reflects your creditworthiness, which lenders use to decide if they’ll approve your loan and what interest rate to offer. Scores typically range from 300 to 850. Here’s a quick breakdown:

• 300-579: Poor
• 580-669: Fair
• 670-739: Good
• 740-799: Very Good
• 800-850: Excellent

How Credit Inquiries Work

When you apply for a mortgage pre-approval, lenders perform a credit inquiry. There are two types: hard and soft inquiries. Hard inquiries occur when you apply for credit, while soft inquiries happen when you check your own credit or a lender checks it for promotional reasons. Hard inquiries can slightly lower your score, typically by about 5 points, and they stay on your report for two years.

Impact of Multiple Inquiries

When you’re shopping for a mortgage, multiple hard inquiries can stack up. However, if you apply for pre-approvals within a 45-day period, most credit scoring models (like FICO and VantageScore) treat these as a single inquiry. This means you can compare different lenders without the full impact of each inquiry weighing down your score.

The Timeline of Credit Score Changes

Short-Term Effects

After a hard inquiry, you might see a slight drop in your credit score, usually around 5 points. This drop can happen within a few days of your application. For example, if Sarah, a 35-year-old teacher in Denver, has a credit score of 720 and applies for three mortgage pre-approvals within a week, her score could drop to 715 or even 710 temporarily.

Long-Term Recovery

The good news is that your score typically rebounds quickly, especially if you manage your other credit accounts well. By consistently making on-time payments and keeping your credit utilization low, your score can recover to, or even exceed, its previous level within a few months.

Real-World Scenario: Sarah’s Home Buying Journey

Let’s look at Sarah again. She’s looking to buy her first home priced at $350,000. She knows she needs a good mortgage rate, so she applies for pre-approval with three different lenders within a week.

• Initial Credit Score: 720
• Pre-Approval Amount: $280,000
• Interest Rates Offered:
  • Lender A: 3.5%
  • Lender B: 3.75%
  • Lender C: 3.25%

After applying, her score drops to around 715. The good thing is that she finds the best rate from Lender C, saving her $50 a month on her mortgage payment. Over 30 years, that’s a savings of $18,000!

Choosing the Right Time to Apply for Pre-Approvals

Timing Matters

When you’re ready to shop for a mortgage, timing can make a difference. If you’re planning to make multiple inquiries, try to do it all within a short window. A 45-day period is key to minimizing the impact on your credit score.

Seasonal Trends in the Housing Market

Consider the seasons. Spring and summer often see more homes on the market, so you might want to begin your pre-approval process in late winter. This gives you time to shop around while still adhering to the 45-day rule.

Managing Your Credit During the Process

Monitor Your Credit Score

It’s a good idea to keep an eye on your credit score during the mortgage pre-approval process. Many credit monitoring services allow you to check your score regularly without impacting it. If you see a significant drop, you can take steps to improve it before finalizing a mortgage.

Pay Off Existing Debt

If you have credit card debt or other loans, consider paying them down before applying for pre-approval. Reducing your credit utilization ratio (the amount of credit you’re using compared to your total credit limit) can help boost your score. For example, if you have a credit limit of $10,000 and you owe $3,000, that’s a 30% utilization rate. Paying down to $1,000 owed would drop your utilization to 10%, positively impacting your score.

Real-World Scenario: David’s Smart Strategy

Meet David, a 40-year-old engineer in Austin. He wants to buy a $500,000 home and has a credit score of 750. Before applying for pre-approval, he pays down his credit card debt from $5,000 to $2,000. He then applies to two lenders within a week.

• Initial Credit Score: 750
• Pre-Approval Amount: $400,000
• Interest Rates Offered:
  • Lender A: 3.4%
  • Lender B: 3.5%

David’s score dips to 745 after the inquiries. However, he’s saved around $60 monthly compared to what he would’ve paid if he hadn’t lowered his debt. Over 30 years, that’s a savings of nearly $21,600!

FAQs

1. How many times can I apply for pre-approval without hurting my credit score?

You can apply for multiple pre-approvals within a 45-day period without significantly affecting your score. As long as you keep your applications close together, they’ll typically count as one hard inquiry.

2. Will my credit score drop if I only check my own credit?

No, checking your own credit is considered a soft inquiry and won’t affect your credit score. It’s a good idea to do this before applying for a mortgage to know where you stand.

3. What other factors can affect my credit score when applying for a mortgage?

Besides hard inquiries, other factors include your payment history, credit utilization, length of credit history, types of credit accounts, and any new credit accounts you’ve opened.

4. How often should I check my credit score when preparing for a mortgage?

You should check your credit score a few months before applying for a mortgage. This gives you time to address any issues and improve your score if needed.

5. What’s the best way to improve my credit score before applying?

Pay off outstanding debts, make all payments on time, and keep your credit utilization below 30%. Diversifying your credit types can also help, like having a mix of installment and revolving accounts.

Conclusion

Multiple mortgage pre-approvals can impact your credit score, but with a little strategy, you can shop around without significant drawbacks. Remember to consolidate your applications into a short timeframe and keep an eye on other factors that influence your credit. By doing so, you can secure the best mortgage rate and save money in the long run. If you’re ready to start the process, check your credit score, pay down any debts, and get those pre-approvals lined up!