Does Getting Pre-Approved Affect Your Credit Score in Canada?
Navigating the homebuying process in Canada involves several important steps, with mortgage pre-approval often being one of the first. While pre-approval offers numerous benefits, many prospective homebuyers worry about potential impacts on their credit score. This concern is particularly common among those new to the housing market who want to protect their creditworthiness while preparing for one of life’s biggest purchases.
Understanding Mortgage Pre-Approval
Mortgage pre-approval is a preliminary evaluation by a lender that determines how much money you can borrow based on your financial situation. During this process, the lender examines your income, assets, debts, and credit history to determine your borrowing capacity and the mortgage rates NB Canada you qualify for.
A pre-approval provides several advantages:
Knowledge of your budget before house hunting
Increased credibility with sellers
Locked-in interest rates (typically for 60-120 days)
Streamlined final approval process once you find a property
For a first time home buyer NB, pre-approval is often recommended as an essential early step that provides clarity in a potentially overwhelming process.
How Pre-Approval Affects Your Credit Score?
The short answer is yes, mortgage pre-approval typically affects your credit score, but usually only minimally and temporarily. Here’s what happens:
The Credit Check Process
When you apply for pre-approval, lenders perform what’s called a “hard inquiry” or “hard pull” on your credit report. This differs from a “soft inquiry” (like checking your score) because it’s an official review by a potential creditor.
Hard inquiries can impact your credit score in the following ways:
Score Reduction: A hard inquiry typically causes a small decrease in your credit score, usually between 5-10 points.
Temporary Effect: This impact diminishes over time and typically disappears completely after 12 months, though the inquiry remains visible on your report for about two years.
Multiple Inquiries: Credit bureaus (Equifax and TransUnion in Canada) recognise that consumers shop around for the best mortgage rates NB, and elsewhere. Multiple mortgage inquiries within a short timeframe (typically 14-45 days, depending on the scoring model) are often treated as a single inquiry to minimise the impact.
Factors That Determine Impact Severity
Several factors influence how much a pre-approval affects your credit score:
Credit History Length: If you have a long, established credit history, a single inquiry will have less impact than for someone with a limited credit history.
Recent Credit Activity: If you’ve recently applied for multiple credit products (credit cards, loans, etc.), another inquiry could have a greater impact.
Overall Credit Health: Those with excellent credit scores (740+) may notice less impact than those with average or below-average scores.
Number of Applications: Shopping multiple lenders within a short window minimises the impact, but spreading applications over several months multiplies the effect.
Minimising Credit Score Impact During Pre-Approval
If you’re concerned about protecting your credit score during the mortgage pre-approval process, consider these strategies:
1. Concentrate Your Rate Shopping
Do your research first, then submit all mortgage pre-approval applications within a 14-day window. This ensures the credit bureaus treat multiple inquiries as a single inquiry for scoring purposes.
2. Avoid Other Credit Applications
In the months before and during your home search, avoid applying for new credit cards, auto loans, or other credit products. This is especially important for those considering debt consolidation New Brunswick options alongside a mortgage—timing these financial moves strategically can help preserve your credit score.
3. Work With a Mortgage Broker
Instead of applying directly with multiple lenders, consider working with a mortgage broker who can shop around for rates using a single credit inquiry. This approach can help you find competitive rates while minimising the impact on your credit score.
4. Check Your Score First
Before applying for pre-approval, check your credit report and score (which doesn’t affect your score) to identify and address any issues. This helps ensure you’re presenting the strongest possible application.
When Pre-Approval Makes Sense Despite Credit Impacts?
Even considering the potential credit score impact, mortgage pre-approval offers significant benefits that typically outweigh the temporary credit score reduction:
Market Readiness
In competitive housing markets, sellers and their agents often prefer buyers with pre-approval because it demonstrates serious intent and financial capability. This advantage is particularly valuable in areas with limited housing inventory.
Budget Clarity
Knowing exactly how much you can borrow helps narrow your home search to appropriate properties, saving time and preventing the disappointment of falling in love with homes beyond your price range.
Rate Protection
Most pre-approvals include rate holds that protect you from interest rate increases during your home search (typically for 60-120 days). This can provide significant savings if rates rise while you’re shopping for a home.
Negotiation Power
Pre-approved buyers often have stronger negotiating positions because sellers have greater confidence in the deal closing successfully.
Special Considerations for First-Time Homebuyers
First-time homebuyers often have thinner credit files and may be more vulnerable to credit score impacts. However, they also stand to benefit significantly from the guidance and preparation that come with pre-approval.
For those looking to enter the housing market in New Brunswick, understanding provincial programs alongside federal initiatives like the First-Time Home Buyer Incentive can provide additional financial advantages that may outweigh concerns about minor credit score fluctuations.
The Bottom Line
While mortgage pre-approval does typically result in a small, temporary reduction in your credit score, this impact is generally minor compared to the benefits received. For most homebuyers, the advantages of knowing your budget, strengthening your offer, and locking in rates outweigh the temporary credit score dip.
By timing your applications strategically and limiting other credit activities during your home search, you can minimise the impact while positioning yourself for success in the homebuying process. Remember that the small credit score impact of pre-approval is temporary, while the benefits of proper preparation for homeownership can last a lifetime.