It's generally a pretty good idea to get pre-approved for a home loan before you find your dream property. Doing so can help you narrow down your ideal price range and lets know roughly how high you'll be able to bid if you go to auction. Many sellers also look positively on potential buyers who have pre-approval, as it suggests they're more serious contenders.
Some people though are apprehensive about getting home loan pre approval as they're worried their credit score could take a hit. Here's what you should know about the impact mortgage pre-approval can have on your credit score.
Does mortgage pre-approval affect your credit score?
Getting pre-approved for a mortgage can impact your credit score. Any time a lender requests a copy of your credit report from a credit reporting bureau (Equifax, Experian, and illion are the three main bureaus operating in Australia), it's enquiry is recorded. Records of these enquiries can remain on your credit report for up to five years.
However, there are differences in the type of enquiry performed. While home loan pre-qualification and home loan pre-approval are often used interchangeably, they're slightly different things and have different implications for a person's credit report.
Mortgage pre-qualification
Receiving home loan pre-qualification is a less comprehensive process than getting a formal home loan pre-approval. Pre-qualification is more of an estimate of your borrowing power and can help guide you on the types of home loans available to you.
When you apply for pre-qualification, your home loan lender might perform what's known as a 'soft enquiry'. While this may be recorded on your credit report, it shouldn't affect your credit score. A soft enquiry is also the method at play if an employer or insurance provider requests a copy of your credit report, or if you check your credit score yourself.
Home loan pre-approval
Home loan pre-approval can give you a more exact idea of the size of the loan your lender is willing to write you. It usually requires more documentation than a pre-qualification and can be a longer process.
Home loan pre-approval generally demands a 'hard' credit check, which can temporarily lower your credit score. Though, according to Experian, a person getting pre-approved for a home loan will generally only see their credit score reduced by a few points and the drop is "usually short lived".
What might cause problems is that this drop can happen every time you get pre-approved for a home loan. A borrower who seeks pre-approval from several different home loan lenders will likely have each application recorded as a separate hard enquiry. This can have a much more significant and longer lasting affect on your credit score.
How to minimise the impact of home loan pre-approval on your credit score
Since each application for home loan pre-approval is likely to be recorded on your credit report as a separate 'hard enquiry', some borrowers might find themselves in a bit of a bind. You might want to compare your options, which would ideally mean getting pre-approved by lots of mortgage lenders so you know which will provide the best offer. However, you also don't want your credit score to take a major hit, as that could seriously impact your ability to borrow money for a while.
Unfortunately, there isn't a perfect solution, but there are a few ways borrowers might be able to mitigate this balancing act.
Seek pre-qual, not pre-approval
Since pre-qualification only demands a soft enquiry, it shouldn't hurt your credit score. This means you might be able to receive an estimate of your borrowing power from a variety of different lenders without your credit score taking a hit.
However, it's essential to clarify the terms, as some lenders may treat pre-qualification similarly to formal pre-approval, which includes a hard enquiry. Make sure you understand how each lender handles pre-qualification to avoid unexpected hits to your credit score.
Maintain a strong credit score
A hit to your credit score might be unavoidable when you seek home loan pre-approval. While this can be frustrating, it's often worthwhile in exchange for the benefits being pre-approved can provide. One way to minimise any damage is to maintain a strong credit score prior to seeking pre-approval, as that may mean you absorb the impact better than you otherwise would have.
Ensuring you pay all your bills and existing debt repayments on time, periodically checking for reporting errors, and enlisting a credit repair service if there're problems with your score can be beneficial.
Read more: How to improve your credit score
Use a mortgage broker
A good mortgage broker should have a sound knowledge of the products and interest rates available to you. A broker might be able find your ideal loan without your credit score needing to take a hit. Keep in mind, however, that since your mortgage broker will essentially act as your agent, a hard enquiry will still be recorded on your credit report when you apply for a home loan through them.
Compare home loans yourself
Alternatively, there's usually enough information out there on home loan products and their criteria for you to do your own research and find your optimal lender. By comparing a home loan's comparison rate and features, you might be able to pinpoint the exact product you're after and therefore will only need to approach one lender for pre-approval. By limiting the number of applications you put in, the damage pre-approval poses to your credit score will likely be minimal.
Here are some of the most competitive home loan options available now from lenders who offer mortgage pre-approval:
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.04% p.a. | 6.06% p.a. | $3,011 | Principal & Interest | Variable | $0 | $530 | 90% | 4.6 STAR CUSTOMER RATINGS |
| Promoted | Disclosure | |||||||||
6.09% p.a. | 6.11% p.a. | $3,027 | Principal & Interest | Variable | $0 | $250 | 60% | |||||||||||||
5.99% p.a. | 5.90% p.a. | $2,995 | Principal & Interest | Variable | $0 | $0 | 80% |
| Disclosure | |||||||||||
5.99% p.a. | 6.51% p.a. | $2,995 | Principal & Interest | Variable | $0 | $530 | 90% |
| Disclosure | |||||||||||
6.14% p.a. | 6.16% p.a. | $3,043 | Principal & Interest | Variable | $0 | $350 | 60% |
Collections: Mortgage Pre-approval Buying a home
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