Before shopping for a home, prospective home owners often visit one or more lenders and obtain a letter of preapproval for a home loan. A lender preapproves a home buyer after examining the prospective borrower's finances and credit history and determining the terms under which he would would issue them a loan. A loan preapproval itself does not affect the borrower's credit score, but a credit check run before the preapproval likely will drop the score by a few points.
Preapproved Loans
Preapproved loans are sought by prospective buyers for two reasons. First, receiving a preapproved loan gives them an idea of how much the purchase of a house will cost. Second, showing a preapproved loan letter to house sellers may help convince the sellers the buyers can afford the house, making them more attractive candidates. To issue this letter, lenders must examine a number of documents related to the buyers' finances, including his credit report.
Credit Check
When a lender examines the credit report of a prospective borrower seeking a loan, this check is known as a "hard" inquiry. A hard inquiry is defined as an inquiry performed because a borrower is considering taking out additional credit. Each hard inquiry results in a person's credit score dropping several points. This is because credit reporting agencies interpret the fact that an individual is seeking new credit as an indication he may default on his current loan.
Short-Term Effects
Only the inquiry made by the lender is reported to the credit reporting agency. A preapproved loan is not reported to the credit reporting agency unless the borrower agrees to its terms and decides to take out a loan. For this reason, only the inquiry affects an individual's credit score. The drop will be small--generally only several points--and lasts only a short time.
Multiple Inquiries
While shopping for a loan, prospective borrowers may apply to or request preapproved loans from a number of lenders. Each time the lender probably will run a credit check. However, multiple credit checks from similar lenders within a short period of time generally count against a person's credit score only as much as a single credit check. This is because credit reporting agencies interpret these checks as a sign that the individual is shopping for a loan, not preparing to take out multiple new lines of credit.
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