Could Mortgage Preapproval Hurt Our Credit?

Q: If we get preapproved for a home loan and do not find the perfect house right away -- or decide not to buy -- what happens to our credit score?

Applying for any kind of loan can ding your credit score, explains Barry Paperno, consumer operations manager for Fair Isaac, the company that created FICO scores. "Typically, you would see a drop of five points or less," says Paperno.

That's because when lenders request a copy of your credit report as part of the loan-application process, their requests are considered hard inquiries, as opposed to the soft inquiries that occur when you or existing creditors check your report. A hard inquiry stays on your credit report for two years and affects your FICO score for a year.

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The impact of one hard inquiry is generally minimal because inquiries make up only 10% of your score. The effect could be magnified, however, depending on your overall profile and the total number of inquiries made -- if, say, you apply for a new credit card, an auto loan and a mortgage in the same year.

Paperno recommends checking your score before you talk to a lender (go to www.myfico.com to see how various scores and mortgage rates currently match up). If an inquiry could push you below the cutoff for a better rate, wait to be prequalified until you are ready to sign the contract for a new home, and use the time to boost your credit score by paying your bills on time.