Does Mortgage Pre-Approval Affect Credit Score in Canada?

When seeking a mortgage in Canada, one of the initial steps is often to get pre-approved by a lender. This process helps you understand how much you can borrow and shows sellers that you're a serious buyer. However, a common concern is whether this pre-approval process impacts your credit score. In this comprehensive guide, we will explore how mortgage pre-approval affects your credit score, the factors involved, and what you can do to manage its impact.

Understanding Mortgage Pre-Approval

Mortgage pre-approval is a process where a lender evaluates your financial situation to determine the amount of mortgage you qualify for. This typically involves submitting financial documents, such as your income, employment status, credit history, and current debts. The lender then reviews these details to give you an estimate of the mortgage amount you can expect.

Impact of Pre-Approval on Credit Score

The effect of mortgage pre-approval on your credit score primarily stems from the credit inquiry involved. There are two main types of credit inquiries:

1. Hard Inquiry: This occurs when a lender reviews your credit report as part of the application process. Hard inquiries can slightly impact your credit score but generally have a minor effect if you manage your credit well.

2. Soft Inquiry: This happens when you check your own credit report or when a company checks your credit for pre-approval or pre-screening purposes. Soft inquiries do not affect your credit score.

Mortgage Pre-Approval and Hard Inquiries

When you apply for mortgage pre-approval, the lender will perform a hard inquiry on your credit report. Here’s how it affects your credit score:

1. Minor Score Drop: A hard inquiry might cause a small, temporary drop in your credit score. This is because it suggests you are seeking new credit, which can be seen as a risk factor by credit scoring models.

2. Short-Term Impact: The impact of a hard inquiry is usually short-lived. After a few months, the effect on your credit score tends to diminish, especially if you continue to manage your credit responsibly.

Multiple Inquiries and Credit Scoring

If you’re shopping around for the best mortgage rate, you might have multiple lenders perform hard inquiries. Here’s what you need to know:

1. Shopping Window: Credit scoring models, like FICO and VantageScore, recognize that mortgage shopping is a common practice. They typically allow for a grace period during which multiple inquiries within a short timeframe are treated as a single inquiry. This period is usually 14 to 45 days, depending on the model.

2. Rate Shopping: During this window, multiple inquiries for the same type of loan (like a mortgage) are consolidated into one, minimizing the impact on your credit score.

Maintaining Your Credit Score

To ensure that your credit score remains healthy during the pre-approval process, follow these tips:

1. Check Your Credit Report: Before applying for pre-approval, review your credit report to ensure all information is accurate and to address any potential issues. You can get a free credit report annually from major credit bureaus.

2. Limit Hard Inquiries: Try to limit the number of hard inquiries by only applying for pre-approval with a few lenders. Focus on lenders who offer pre-qualification with a soft inquiry when possible.

3. Manage Your Debt: Keep your credit card balances low and make timely payments. This will help maintain a good credit score and show lenders that you are a responsible borrower.

4. Avoid New Credit Applications: Avoid applying for new credit cards or loans while seeking mortgage pre-approval, as this can lead to additional hard inquiries and potentially lower your score.

Conclusion

In summary, while mortgage pre-approval does involve a hard inquiry that may cause a slight, temporary drop in your credit score, the overall impact is generally minimal. By managing your credit responsibly and being strategic about your mortgage applications, you can mitigate any negative effects and continue to work towards your homeownership goals. Understanding these nuances helps you navigate the mortgage process more effectively and ensures that your credit score remains in good shape.