Credit Score Dip Is Not Fatal

When you get preapproved for a mortgage, you’ll know exactly how much of a monthly payment you can afford. This will also tell you how much of a home you can afford.

During preapproval, you’ll work with a mortgage lender that will check your credit reports and three-digit credit score. You’ll also provide your lender with proof of your income and debts, usually in the form of copies of your recent paycheck stubs, income-tax returns, bank statements and W-2 statements.

Your lender will analyze this information and tell you how much of a mortgage it is willing to give you. This information will be included in a pre-approval letter.

This is a key step in buying a home: If your preapproval letter states that your lender is willing to approve you for a $350,000 mortgage, you know not to search for homes that cost, say, $450,000.

A preapproval is good for a set number of days, often 60 to 90. If you find a home and make an offer during this time, you can then work with the lender who preapproved you to close your mortgage.

A preapproval is free. And you are under no obligation to work with the mortgage lender that preapproved you after you find a home. You can still shop around for a lender who will offer a lower interest rate and lower closing costs.

A dip in your credit score

The one negative with a preapproval, and it’s a small one, is that your credit score will take a slight dip after the process.

That’s because your lender will conduct what is known as a hard pull while checking your credit. It varies, but this pull might cause your credit score to drop by up to 5 points.

You should not let the fear of such a slight drop in your score keep you from getting preapproved for a mortgage. The benefits of a preapproval far outweigh the negatives of a slight drop.

That’s mainly because this credit score dip is temporary. If you continue paying your bills on time each month and you keep your credit card debt low, your score will recover quickly. How quickly it recovers varies, depending on the score before this drop and your payment history after it.

A hard credit inquiry remains on your three credit reports for two years. Lenders and credit card providers can see that you applied for new debt – a mortgage loan, in this case – when they check your reports during this time. But the impact of this inquiry lessens over time, especially if your credit report isn’t marked with dozens of hard pulls from credit card or other loan applications.

The message? A credit score dip from a mortgage preapproval is too small and too temporary to scare you away from getting preapproved for a mortgage.