Can Pre-Approval Affect Credit Score?
A mortgage broker can protect your borrowing power!
Before putting a deposit down on a property, most mortgage brokers recommend getting a pre-approval first.
It puts you in a better position with the vendor (seller) but be aware that it will be recorded on your credit file, whether you proceed with your application or not.
As a general rule, you should avoid applying with multiple lenders at the same time because it can affect your borrowing power in the future.
Are mortgage enquiries that bad?
The short answer is, no.
Compared to credit cards, personal loans or car loans, having one or even two pre-approval enquiries on your credit file within 12 or even 6 months won’t affect your credit score too much.
In fact, it’s not uncommon for investors looking to rapidly grow their property portfolio to make 3 or even 4 home loan enquiries in a couple of months!
In some cases, it may even improve your credit score, particularly if you’ve never had any enquiries on your credit file before.
Where it can be a problem is if you’ve applied for a pre-approval with multiple lenders in a short timeframe.
You may well be shopping around to see what deal you can get but most banks won’t see it that way.
They it as a shopping pattern where you’ve been declined by one lender and now you’re trying to see who will approve your application. Not a good look!
What’s a better alternative?
A mortgage broker can properly assess your situation, for free, and provide you with up to three home loan recommendations with an indicative interest rate and list of fees.
The best news is that you won’t get an enquiry on your credit file so your credit score won’t be affected!
Please call us on 1300 889 743 or complete our free assessment form to speak with one of our brokers about your home loan enquiry.
What is recorded on my credit file?
When you apply for a mortgage, credit card, personal loan or any other debt facility, the following will be recording on your credit file:
- The enquiry date.
- The credit provider.
- The credit amount you applied for.
- The reason for the enquiry.
Generally speaking, banks aren’t comfortable lending to someone who has made any more than one or two enquiries over a 6-month period.
What’s changed with credit reporting?
Since 12 March 2014, credit reporting agencies like Veda (which will likely be rebranded as Equifax in March 2017) have been collecting information from some credit providers about when an account is open and closed.
If an enquiry was made and an account opened, it shows that the application for your pre-approval proceeded.
If not, your pre-approval was declined.
Under the Comprehensive Credit Reporting (CCR) changes made to the Privacy Act 1988, lenders can now build a clearer picture of your character as a borrower.
So even though you made multiple enquiries for a pre-approval, some lenders may be satisfied to lend to you if you were approved for the enquiries.
It sounds great in theory but the problem is that not all lenders are providing this information to credit reporting agencies.
Banks still see multiple enquiries in a short period of time as a negative.
Case study: making multiple pre-approval applications
Let’s say you applied for a pre-approval with your bank.
Over the next few months, you start shopping around for a property but the particular suburb you’re looking at is a tightly-held real estate market.
It ends up taking you more than 6 months to find the perfect home in a price range that suits your budget.
Because pre-approvals only last for 3 months, you would have had to reapply for a pre-approval.
During this time, you also signed up for a new mobile phone plan after your old plan expired.
You’ve essentially added three enquiries to your credit file over a space of 6 months:
- Your mobile phone contract.
- Two mortgage enquiries.
This could spell the end of your home loan application if you were to apply for your second pre-approval with a different bank.
However, if you’re applying with the same bank, this shouldn’t be an issue.
That’s because they would already have your details on file and the most you’d need to provide is a couple of current payslips and a bank statement showing your savings.
Do you need a home loan?
Whether you’re an investor or you want to buy your dream home, we all like to shop around for a great deal.
Do it the smart way by speaking with a mortgage broker and protecting your credit score.
Call us on 1300 889 743 or fill in our online enquiry form today!