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Background Info: My wife and I are looking to purchase our first home/condo. Given our combined gross annual income of ~$100k and lack of any actual debt, we're looking at properties in the $200-250k range. We currently have enough cash to put down ~10% and some semi-liquid stock assets (UTMA funds) to bring that up to 15% and have still some emergency cash. We wanted to save up 20% to avoid PMI and tax escrow and whatnot, but we ran the numbers and decided we'd be paying less than rent even with PMI and such included. Apparently we have to continue paying PMI for at least 2yrs (at least with our bank we would), but our plan is to pay down the principal faster and keep the PMI to a minimum.

Question: It seems that getting pre-approved (not just pre-qualified) for a mortgage can help make the decision between you and another non-pre-approved applicant and makes closing quicker and easier (with some of the leg work up-front), but I'm having troubles reconciling that with 1) getting multiple quotes for mortgage rates (which tend to change from time to time :p) and 2) limiting potential damage to your credit score from multiple hard-pulls.

My understanding is that (correct me if I'm wrong here) a pre-approval would require a hard-pull of both of our credit reports from all three bureaus as well as additional info like proof of income, tax returns, residence history, etc. (requirements here may depend on lender, but my understanding is that they [generally?] get scores from all three and use the middle one, and I don't know if it's possible, or even worth it, for them to get scores without the report - credit reports & scores continues to be a confusing matter)

Any pulls within the same ~30 days count as one credit inquiry as far as credit-scoring is concerned, though, so it would seem to make sense to have all potential lenders pull it within that time period. I'm considering four lenders (two brokers recommended by friends, one broker recommended by Google maps reviews, and my standard local/national/international bank - too many?), which seems like a lot of work, but I assume much of that will be similar for all four (e.g., we don't have different tax returns, income stubs, etc. to give to different lenders - they'd all be the same).

I'll sum this up in two somewhat-competing questions:

  1. Assuming you're within the 60-90 days that the pre-approval is valid for, will the lender do another hard-pull before approving the final loan? I assume not, but if that's not the case, it would seem to weaken the argument of getting multiple pre-approvals right away b/c you could have just had one done, find the best rate later, and close with the lender with the best rate (who would then do a final pull).
  2. If you just get pre-approved from one lender, what's to say they'll have the best deal when you decide to close? (no matter which method you use to pick that one initial lender)

Alternatively, am I over-thinking this? I do tend to do that, and perhaps an initial pull and a later final-pull won't hurt that much anyways... After all, the final-puller would know what the initial pull was all about...

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    I believe you are overthinking it and it isn't worth the mental energy to micro-manage your credit score to that degree. – JohnFx Apr 17 '12 at 2:33
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    You are over-thinking this. Don't get multiple pre-approvals. Work out who has the best deal and get pre-approved by them. Usually they will guarantee their rates for some number of days, 30 or 60 at least. – DJClayworth Apr 17 '12 at 13:13
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The problem is not the credit score; it is the "competing" inquiries. Multiple inquiries will be considered as one if done withing a short time period (2 month, IIRC) and for the same kind of credit, because people do shop for rates, you're not the first one to do that. So don't worry about that.

What you should be worrying about is banks asking questions about these inquiries, which is an annoying (at least for me) technicality. You'll have to explain to each of the banks that you want a pre-approval from that you're going to take the mortgage from them, and not from anyone else. In writing, with your signature notarized. Which is OK because it's done (the signature and notarizing) at closing, but you'll have to "convince" them that they're the chosen ones to get approved.

Other than that it's pretty simple. I've done that (including the declaration that I'm not going to take any loans based on the other "competing" inquiries), and it worked fine when I took the original mortgage, and when I refinanced it later in a similar "shopping" fashion.

Do it closer to the actual bidding, because closing does take at least 3-4 weeks, and the rate lock is usually for 30-60 days, so not much time to shop if you take that road.

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    This seems like sound advice - we'll hold off on going through all the pre-approvals and head to the realtor first, then when we have a few places in mind we'll discuss the approval process... thanks! – johnny Apr 17 '12 at 12:16
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Johnny. I recently bought my first home as well, and I have worked in the credit business (not mortgage), so I think I can answer some of your questions. Disclaimer first that I'm in NY, and home buying does vary from state to state.

In my experience, pre-qual is not too different from pre-approval. Neither represents any real committment on the part of the bank (i.e. they can still deny approval at any point), and both are based on pulling your credit bureau and calculating ratios based on your stated (probably not documented) financial information. It's theoretically possible that a seller would choose a pre-approved buyer over a pre-qualified buyer, all other things being equal, but all other things are seldom equal.

Remember also that you don't need to ultimately get a mortgage from the same bank that you use for the pre-qual. The pre-qual just shows that you are probably credit-worthy and serves to give you some credibility with sellers. Once you have an accepted offer and need to find a real mortgage, you can shop around for the best rate and best loan structure. Banks don't need to have pulled your credit to quote rates, but they will need to have a general idea of your FICO range. Once you find the bank you like with the best rate and actually apply for the loan, they will pull a hard bureau, and if your scores are different from what you said before, the rate may change, but within the same range, you'll generally be ok. Also, banks do not necessarily pull all 3 bureaus; they may only pull 1, as it costs them for each pull.

2 potential downsides to this approach:

  1. 2 banks = 2 hard inquiries, but if you're otherwise clean, it's no big deal at all.
  2. Even within the same bank, if you wait too long, they won't use the same bureau data and will need to do another hard pull, as they will be worried about possible credit deterioration during the long interval.

Also, make sure you have a mortgage/funding clause in your contract, as banks are unpredictable, and make sure you have a great real estate lawyer, not a legal "factory" - the extra few hundred $ are worth it.

Don't overthink this credit stuff too much. Find a good house for a good price, and get a no-nonsense mortgage that you fully understand - no exotic stuff. Good luck!

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    what do you mean by a 'mortgage/funding clause' - I assume it refers to your loan vs. income ratio, but what does it protect against? – johnny Apr 17 '12 at 11:11
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    I'm referring to a clause in the contract that protects you if the bank refuses to give you a mortgage or to find the loan at closing so that you don't lose your deposit. It's something you should be sure to check with your lawyer about once you get to the contract stage. – davesnitty Apr 17 '12 at 14:38

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