Does mortgage pre-approval impact credit?

Plus: The difference between a hard and soft credit check

Does mortgage pre-approval impact credit?

The short answer: Yes—mortgage pre-approval can impact your credit. However, it largely depends on which type of credit check your lender does. To learn about the difference between a hard credit check and a soft credit check, pre-approval and pre-qualification, read on.

How does mortgage pre-approval work?

Mortgage pre-approval is when a mortgage lender verifies your financial information to approve you for a mortgage loan. Prior to shopping for properties, you should always contact a mortgage lender to get an idea of the loan amount you will qualify for.

Throughout the mortgage pre-approval process, a mortgage expert reviews your financial information to decide what mortgage loan you are eligible for and provide you with loan options before giving you a detailed estimate. That information typically includes your monthly mortgage payment, your interest rate, and the closing cost.

The financial information the mortgage expert reviews during the pre-approval process will then be used to determine the interest rate you qualify for and the mortgage amount. The financial information typically reviewed will be your credit history, credit score, pay stubs, tax returns, monthly debt payments, bank statements, and housing payment history.

Usually, your mortgage pre-approval will be good for up to 90 days. The interest rate and mortgage the expert gives to you will also provide a reliable feature to work with when you are searching for properties. It will also allow you to budget for your mortgage payments and figure out the highest property value you will be able to afford.

What is the difference between pre-approval and pre-qualification?

The major difference between pre-approval and pre-qualification for a mortgage is that pre-approval uses verified information to approve you for a loan and pre-qualification does not. Rather than using verified information, pre-qualification uses an estimate. In other words, pre-qualification uses a non-verified estimate of the kind of loan you will qualify for and gives you an estimate of the interest rate that you will end up paying on your mortgage.

Pre-approval, on the other hand, is the part of the process where the lender will verify your financial details and approve you for the mortgage. It is the part that ends with you receiving formal documentation confirming the interest rate and mortgage size that you can get from your mortgage lender.

Pre-approval, which is valid for 90 days, gives a written commitment of your mortgage affordability. It’s quoted using verified information, uses documents detailing your financial situation, and utilizes a hard credit inquiry. Pre-qualification, on the other hand, estimates your affordability at one time, gives an early estimate of affordability, and is quoted using a self-attested estimate. It also uses answered questions on your financial situation and is a self-reported credit score.

Two ways to check your credit:

There are two ways to check your credit: a soft credit check and a hard credit check. Essentially, you are the only one who would see a soft credit check – it is not seen by other lenders, and it has no impact on your credit score. A hard credit check indicates that a lender is going to give you credit, showing up when other lenders conduct credit checks on you, and it can impact your credit score. Here is a deeper look at the differences between a soft credit check and a hard credit check:

Soft credit check. Lenders use soft credit checks when deciding if they should pre-approve you for a credit card. A lender may also use a soft credit check if your current lender pulls a credit report for an account review or when a debt collector reviews a recent credit report. Checking your own credit rating will also get logged as a soft credit check.

Hard credit check. Lenders use a hard credit check, on the other hand, when you apply for a loan, commonly a car loan or a mortgage, or a credit card. A hard credit check indicates that you want to take on added debt. It should be noted, as well, that other potential lenders will be able to see any hard credit checks and can therefore impact your credit score. However, any negative impacts will likely only happen if you take out numerous hard credit checks.

Is pre-approval a hard credit check?

Yes. Pre-approval is a hard credit check. Since it involves other parties looking at more detailed information, lenders taking out a hard credit check on you during pre-approval is a standard step in the mortgage approval process. Hard credit checks are therefore routine because lenders provide loans for significant amounts of money.