Ask Phyllis: a blog series of frequently asked real estate questions.
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 prequalification letter to submit a formal offer. So, taking her Realtor’s advice, my daughter got prequalified. Because the lender pulled her credit, her score dropped by five points. I have taken great care in helping all my children establish credit once they turned eighteen, and my daughter has excellent credit. Don’t you think the lender or her Realtor should have informed her how the mortgage preapproval affects her credit? Sally,
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, you authorize the lender to review your credit report from one or more of the three national credit bureaus (Experian, TransUnion, or Equifax). When the lender requests these credit checks, the credit bureaus add a notation called a “hard inquiry” to your credit report. A “hard inquiry” occurs when you apply for new debt, and it can lower your credit score by as much as five points. These inquiries have a greater impact when you have only a few accounts or a short credit history.
In addition, lenders add a code when they check your credit to show the reason for the inquiry. Then, credit bureaus group multiple inquiries of the same type within 30 days and count them as one inquiry. For example, if your lender pulls credit for pre-approval and two other lenders also pull credit within 30 days, the system counts all three as one inquiry.
As a result, credit checks and prequalification remain a necessary part of the home-buying process. Finally, I wish your daughter the best of luck in her home search.
This can be challenging in todays environment. It can day way over thirty days to find a home and have an offer accepted. Meanwhile the preapprovals expire and need to be redone.
Often, they need to be adjusted for different loan amounts as well.