Does getting pre-approval for a home loan affect your credit score?
When it comes time to buy a new home, pre-approval
is an excellent option. This process allows you to find out exactly how much a lender is willing to lend you as a borrower. And that means you’ll be in a fantastic position to find a home that works within your budget and meets all your dream requirements.
But does getting pre-approval for a home loan affect your credit score? And if so, are they really worth seeking out?
Does getting pre-approval for a home loan affect your credit score?
What is pre-approval?
When you’re looking to buy a new home, a pre-approval is an important step in the process. Also called a ‘conditional approval’, a home loan pre-approval means the lender has agreed – in principle – to lend you money towards the purchase of your home. And it’s this step that gives you the green light to really begin negotiating and purchasing the home of your dreams.
Benefits of pre-approval
There are a lot of benefits of pre-approval. These include:
- Verifying your buying power. Pre-approval shows you exactly the amount that you can afford to spend on your new home.
- Outsmarting your competition. Your pre-approval lets you move fast in a competitive market.
- Faster closing. A home loan puts you in a position to close quickly on any potential sale, which makes you more attractive to sellers.
- Saves you time and money. When you understand your budget you can laser focus your search, saving time and money.
- Protects your deposit. You generally need a deposit to buy a home. But if you can’t get the rest of the financing, your deposit could be at risk. Pre-approval protects you from this risk.
Risks of pre-approval
But does getting pre-approval for a home loan affect credit? Yes, this is a risk when you apply for multiple pre-approvals.
On balance, we see the benefits of pre-approvals to far outweigh the risks. But getting multiple pre-approvals is not the way to go. Sometimes buyers believe that it will give them an edge in getting the home of their dreams. But actually, it could leave you in a worsened position.
Every time you apply for a pre-approval, the lender will check your file and credit score. This allows them to apply their own risk assessments to you as a buyer. These enquiries against your credit are known as ‘hard enquiries’ and they are a form of credit check. This means that each time you apply for a pre-approval it is recorded on your credit report.
Multiple hard enquiries, particularly when they are done around the same time, can indicate to financial institutions that you’re in financial difficulties. They see these multiple enquires and assume that you have been rejected by these lenders. This can then lower your credit score, making you look riskier than you actually are.
Hard enquiries can stay on your credit score for up to five years. So, you really want to ensure that you are only seeking out the pre-approval that you need.
Getting a pre-approval that won’t harm your credit score
Getting pre-approval for a home loan can affect your credit… but it doesn’t have to. The first step is to ensure you do plenty of research and are seeking out the right loan type and lender for your needs. This will help you to avoid the problem of chasing pre-approvals from multiple lenders.
If you’ve already applied for pre-approval, but the time limit has run out (generally 90 days), speak to your lender. Ask them to extend your pre-approval, rather than going through the pre-approval process again.
Finally, keep on top of your credit report. Review it yearly to make sure there are no mistakes that you can rectify before applying for a home loan pre-approval.
