Understanding Pre-Approval
Josh Neimark
Pre-approval is a process that helps homebuyers understand their purchasing power before making an offer on a property. Lenders evaluate the buyer's financial history, income, and credit score to determine the maximum amount they can lend for a home loan. Pre-approval can give homebuyers an edge in a competitive housing market by showing sellers that they are serious buyers.
How Pre-Approval Affects Credit Scores
Contrary to popular belief, pre-approval does not have a significant impact on credit scores. When a lender requests to pull a credit report during the pre-approval process, it is considered a soft inquiry. Soft inquiries do not affect credit scores and can only be seen by the borrower, not other lenders or creditors.
However, if the borrower decides to move forward with a home loan, the lender will perform a hard inquiry, which can affect the credit score. Hard inquiries occur when a lender requests a borrower's credit report with the intent of extending credit. These inquiries can stay on credit reports for up to two years but typically only affect scores for a few months.
The Benefits of Pre-Approval
Pre-approval has several benefits that can help homebuyers navigate the home-buying process. Firstly, pre-approval gives buyers a clear understanding of their budget, helping them narrow down their search for a home. Secondly, pre-approval shows sellers that the buyer is serious and financially capable of closing the deal, giving them a competitive advantage in a competitive market. Lastly, pre-approval can save buyers time and stress by eliminating the need to shop for a loan after making an offer on a property.
Factors That Affect Credit Scores
While pre-approval does not have a significant impact on credit scores, several other factors can affect credit scores. Payment history, credit utilization, and credit age are some of the most crucial factors that determine credit scores. Late payments, high credit utilization, and new credit accounts can negatively impact scores, while a long credit history with low utilization can positively impact scores.
Conclusion
In conclusion, pre-approval has little to no impact on credit scores, but it can offer several benefits to homebuyers. Pre-approval can help buyers determine their budget, gain a competitive advantage in the housing market, and simplify the home-buying process. However, buyers should be aware of the impact of hard inquiries on credit scores and focus on maintaining a positive payment history, low credit utilization, and a long credit history to improve their credit scores.
