Mortgage preapprovals help you as a home buyer because you know how much you can spend and sellers know you are serious. You are in a better negotiating position when you have financing in place. Credit applications are required for mortgage preapproval, and they result in inquiries that appear on TransUnion, Equifax and Experian credit reports and figure into score calculations, according to the MyFICO credit scoring website.
Effects
Mortgage applications generate hard inquiries, meaning credit report reviews made for the purpose of evaluating a loan application. Soft inquiries, which are generated by your own credit report reviews and pre-screening for marketing offers, do not affect your credit score. A single hard inquiry lowers a credit score by up to five points, and multiple applications hurt it even more. Multiple mortgage preapprovals are an exception if you apply for them within a short time. FICO and other credit scorers consider them as a single application if they happened within two weeks.
Warning
While several mortgage inquiries are lumped together to keep them from hurting your credit score too badly, Jason Goldwasser of Kiplinger's Personal Finance warns that other applications pull the score down if you fill them out in around the same time. For example, your mortgage preapprovals can combine with requests for new credit cards or a car loan within the same year to make it hard to get approval for future applications.
Prevention
Check your FICO credit score before initiating mortgage applications, Goldwasser recommends You are required to pay for your score, but it shows you how lenders will view you. Your mortgage requests could hurt you if your score is borderline, dropping it enough to make you pay higher interest on a mortgage. Skip preapproval if your score needs to be raised and concentrate on catching up credit accounts and building a string of on-time payments while you house shop. Seek financing once you decide on a house and your credit has had time to improve.
Considerations
Certain other credit applications are treated in the same way as mortgage loans. For example, the MyFICO website explains that several inquiries from auto financing companies or banks that handle student loans are lumped together if they occur within a 14-day span. FICO and other credit scorers treat them as one inquiry because they result from loan-rate shopping rather than the opening of several new accounts.
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