Preapproval is usually the first step in getting a home loan or mortgage. You don’t have to go through this process, but it’s often a good idea. That’s because preapprovals involve only soft credit checks and can help you avoid hard inquiries that do negatively impact your credit. So if you’ve been thinking, “Does getting preapproved hurt your credit?” Happily, the answer is no. Preapproval doesn’t take points off your credit score.
Let’s look at the advantages of home loan preapproval and how to get through the process successfully.
The Benefits Of Home Loan Preapproval
Preapproval for a home loan isn’t a guarantee that you’ll receive a loan. It just gives you an idea of what a lender may offer you towards buying your new home. It’s good practice to apply to several lenders for preapproval. If you know where you stand with a few of them, you can reduce the risk of being declined when you make a full application.
Home Loan Preapprovals Don’t Impact Your Credit Score
Each lender will run credit checks, as well as inspect your credit report and rating, to get an overview of your financial health. But these are soft checks (also known as soft inquiries). They aren’t seen by other lenders, and they don’t decrease your credit score.
Home Loan Applications Do Impact Your Credit Score
Once you’ve found your dream home, you’ll need to apply for the offer you received with the preapproval. At this point, lenders will generally run hard credit checks (hard inquiries) to see if you can repay the proposed loan. This means they request your full credit report, usually from the three nationwide credit bureaus. Because these checks cover detailed information about your credit standing, they do impact your credit rating.
However, the effects of these hard inquiries on your credit score are small. It’s not the same as defaulting on a payment. The number of points that come off your score depends on how many hard inquiries have happened in the last few months.
The Best Credit Score for Buying a House
The question of what is a good credit score to buy a house depends on your lender. They have different preferences, influenced by the type of loan you’re applying for, the credit bureau(s) they use for your report, and their scoring system (such as FICO or Vantage Score). A higher score shows you can pay your debts and works in your favor.
Money defines a credit score as “a three-digit number used by lenders to assess your creditworthiness.” Credit scores range from 300 to 850 points. A good credit score to buy a house would fall anywhere between 620 and 800. However, if your score is lower, you may still be able to get a home loan. Some lenders offer loans to consumers with credit scores in the 500s, even though it’s risky. They often try to minimize that risk by offering higher interest rates, meaning you’ll pay a lot more over the term of the loan compared to someone with a higher credit score.
Steps for Getting Preapproved for a Home Loan
- Carefully think about your current financial situation. Money states, “your monthly mortgage payment (includes property taxes and homeowners and private mortgage insurance) should be no more than 28% or less of your gross monthly income.”
- Put together a file of recent payslips, tax returns, W-2 forms, and bank statements showing that you have enough saved for your down payment.
Look at more than one mortgage lender. You could start your research on the Quicken Loans site; you’ll find home-buying guides, mortgage calculators, and current interest rates. Lending Tree gives you access to multiple lenders in one place so you can compare them side-by-side.
- Apply for preapproval with several lenders – while one may not accept you, others might.
You should think about the timing of your preapproval when house-hunting, as they’re only valid for a limited period. According to Money, they usually expire within 30 to 60 days. This means you’ll want to do your real estate research first, then apply for a preapproval once you’ve narrowed down your choices and are almost ready to make an offer.
Top Tip For After Preapproval
Once you’ve been preapproved for a home loan, you need to keep that credit score healthy. Lenders can withdraw any offers if your financial situation declines. Continue making all your current payments as usual. Also, request a free copy of your credit report (a soft check) from the credit bureaus and make sure you’re up to date on everything that’s going on in your credit accounts.
The Cost of Homeowner’s Insurance
Alongside home loan preapproval, you need to think about homeowners’ insurance. Most mortgage lenders won’t fund your home loan unless you have an insurance policy in place. It generally covers damage, theft, injury, or natural disasters affecting your home, property, or personal belongings inside.
The cost of coverage has to be factored into your initial assessment of what you can afford. In 2017, the National Association of Insurance Commissioners released a report indicating that “the average premium for the most common type of home insurance was $1,211” and that “the average increased from $1,192 in 2016.”
When it comes to how much is homeowners’ insurance, premiums differ by individual. Insurance providers set them based on a number of factors, such as:
- The area where you live.
- The size and value of the property.
- The estimated value of personal belongings within your home.
- The coverage limits you choose.
- Any additional structures you have on your property.
Insurance companies also differ in the amount of claim coverage they provide and the limitations and exclusions they incorporate into their policies.
- Research more than one lender to get the best deal.
- Go through the preapproval process before making a full application.
- Keep your credit healthy after receiving pre-approval.
- Factor the cost of homeowners’ insurance into what you can afford.