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Mortgage Pre-approval Affects Credit

Dear Phyllis,
My daughter hopes to buy a home and she is early in the process. Even so, her Realtor insisted she get prequalified before showing her any homes. The Realtor explained to my daughter that if she found a home she loved, she would need a pre-qualification letter to submit a formal offer. So, taking her Realtor’s advice, my daughter got pre-qualified. Because the lender pulled her credit, her score dropped by five points. I have taken great care in helping all of my children establish credit once they turned 18, and my daughter has excellent credit.
Don’t you think the lender or her Realtor should have informed her how the mortgage pre-approval affects her credit?

Dear Sally,
This is a timely question! It’s great that you have taught your children the value of good credit.

To get pre-approved, one must authorize the lender to review their credit report from one or more of the three national credit bureaus (Experian, TransUnion, or Equifax). When the lender requests these credit checks, a notation known as a “hard inquiry” appears on the credit report. “Hard inquiries” are associated with acquiring new debt and they can cause credit scores to dip by as much as five points. Inquiries have a bigger impact when one has just a few accounts or a short credit history.

FICO scores range from 300 to 850. To obtain the best interest rate for a mortgage, one needs a 740 minimum FICO. Since your daughter has “excellent” credit, defined as 800 or above, a five-point drop would not impact her score in any meaningful way. This is likely why her agent didn’t discuss the issue with her beforehand. If the lender only pulled a “soft” credit report, there wouldn’t be any impact on her credit at all. However, she couldn’t get a pre-qualification letter with just the “soft pull.”

In addition, when credit is checked a code is input specifying why. For scoring purposes, any inquiry of a similar kind within a 30-day period will impact the score as if it was only one pull. For example, if her lender pulled credit for her pre-approval and two other lenders did so as well within a 30-day period, it only counts as one inquiry.
Checking credit and getting pre-qualified is a necessary part of the home buying process. Best of luck to your daughter in her home search.