Tuesday, January 1, 2013

If I Get Preapproved Will My Credit Score Go Down?

I recently met a new client who is interested in buying a home this year.  She had a pre-approval from last year, but it expired, so she asked me if she could get pre-approved without having her credit pulled.  Good question! A pre-approval is generally good for 90 days, but after that, a buyer needs to go back to their lender and refresh their pre-approval.

I called a few mortgage lenders I work with and asked some questions which confirmed what I suspected:  You cannot be pre-approved without having your credit pulled.  You can be pre-qualified, but not pre-approved.  So what's the difference?  A pre-qualification is when the lender meets with you, asks a lot of questions about your income, debts and assets and gives you a ball park idea of what you can afford.  As one lender said, this is "useless for an offer situation" as sellers want to know that your financials have been examined closely and that you really can afford their home.  Sellers certainly do not want to take their home off the market and then discover the potential buyer is not qualified.

So why would someone be concerned about having their credit pulled?  Inquiries make up only 10% of your credit score, but if you are hovering near a 740 credit score you may have a valid reason to be concerned. Scores over 740 get the best pricing on interest rates.  A lower rate means a lower monthly payment and significant money saved over the course of the loan.  If you plan to have a FHA loan and put the minimum 3.5% down on your home, the credit score does not matter as much as if you are putting down say 20% or 30%.   First time buyers or buyers with low to moderate income generally select a FHA loan if their credit scores do not qualify them for a conventional mortgage.

So how much damage does pulling your credit score really do?  The answer:  it depends.  If you are considering buying a home and visit a few lenders within a few weeks, and they pull your credit, these multiple pulls are considered one inquiry.  As a result of this inquiry, your credit score could be hit from 3 to 15 points, according to my lenders.  However, if  at the same time you are thinking of purchasing a car and the car dealer pulls your credit, then you choose to add a new credit card to your wallet and have your credit pulled by a number of lenders over a 2 month period, your credit score will take a serious hit.

It is in your best interest to keep your credit score in mind when you are getting ready to purchase a home.  Once you apply for your mortgage, your lender will tell you not to incur any new debt.  It is best to close on the home before you start looking to finance a new car or new furniture for your home.

Securing a pre-approval is an important step that cannot be avoided when purchasing a home, but how you go about doing that, and what the impact will be on your credit scores can vary greatly.  Let me know if you need the name of a reputable lender to help you navigate the financial piece of the home buying puzzle and minimize the impact on your credit score.

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