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.
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.
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.
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 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.
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.
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.
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:
Insurance companies also differ in the amount of claim coverage they provide and the limitations and exclusions they incorporate into their policies.
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