Wednesday, October 26, 2016

Mortgage Preapproval and Your Credit Score: Helping you Shop Without Ruining Your Score


Ah, mortgage preapprovals. You shouldn’t go house hunting without one, but does the preapproval process hurt your credit score? The answer is no, and United Home Loans is here to clear up any confusion on preapprovals, hard credit inquiries, and rate shopping.

What is a mortgage preapproval?
A mortgage preapproval confirms how much house you can afford, and is often required by realtors and sellers before an offer is taken seriously. A valid preapproval analyzes your latest paystubs, bank statements, W2s and tax returns. A credit report on all borrowers is also reviewed. If there are concerns about your debt-to-income ratio, job history, previous collection accounts, etc. they will be addressed before you receive your preapproved loan amount. Once on file, it’s valid for 120 days and the documents, including your credit report, will be used for the official mortgage application. This process puts you at ease when house hunting and saves time when you officially apply for a loan.

Will a hard inquiry ruin my credit score?
Hard inquiries do affect your credit, but not significantly. The exact amount of points isn’t known for sure, as it depends on a complex mathematical formula tailored to your credit history. It’s common to see anywhere from three to five points deducted from your credit score for each hard inquiry. While the inquiry stays on your credit report for two years, the minimal point reduction only remains for one year. 

Will rate shopping for a loan hurt my score?
Although multiple credit inquiries may lower your score, FICO makes an exception for certain types of inquiries. When consumers shop for big-ticket items, such as mortgages and auto loans, they often check rates from multiple sources. This is called "rate shopping" and can lead to numerous credit inquiries from different lenders. According to FICO, if multiple inquiries from shopping for a mortgage loan occur within a 45-day time frame, FICO considers those inquiries as one to minimize the effect on a consumer's credit. 

In the end, a preapproval will help rather than hurt your mortgage application process, so it’s a great idea to know your true budget before you make an offer on a home.  If you’re wondering how much house you can afford or have any questions about your credit report, contact a loan expert here or at 708-531-8388.

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