November 16th, 2019 11:12 AM by Jackie A. Graves, President
IF YOU'RE SEEKING THE best mortgage rates, shop carefully or your credit score
might suffer. Each time you apply for a home loan, a mortgage lender will make a credit inquiry to review your credit
history. These inquiries are reported to the three major credit-reporting agencies: Equifax, Experian and TransUnion.
Because inquiries signal that you are thinking of taking on new
debt, your credit score can dip. But the good news is that the damage from
multiple credit checks by mortgage lenders is typically small.
Even better, a
little planning makes keeping your score in top shape relatively easy as you
shop for a mortgage.
Within a 45-Day Window
When lenders use the
most recent FICO scoring model, consumers have 45 days to comparison shop for
mortgages without damaging their credit.
checks from lenders within that window will be recorded as a single inquiry on
your credit report. The effect on your credit is the same, no matter how many
mortgage lenders you consult, according to the Consumer
Financial Protection Bureau.
But the rules can differ slightly when lenders use older FICO
scoring models, says Joanne Gaskin, vice president of scores and analytics at
FICO. In that case, the window for multiple inquiries to count as just one
inquiry can be as little as 14 days.
Lenders choose which
FICO scoring model to use. That means borrowers under the new model get 45 days
to rate shop, and others under the old model get only 14 days. For that reason,
Gaskin advises taking a cautious approach and trying to complete your mortgage
shopping in 14 days.
Two weeks might not
seem long enough to complete your mortgage comparison shopping. But most
borrowers should be able to compare plenty of lenders' offers within that
window, says John Ulzheimer, a credit expert who has worked for FICO and credit
shouldn't be that hard for you to do almost all of your rate shopping within a
few days if you're really aggressive about it – certainly a week, certainly two
weeks and absolutely within a month," he says.
Shopping Beyond 45 Days
Even if your
shopping extends past 45 days, don't sweat it. The negative effect on your
score will be minor, the CFPB notes. And your savings from securing a lower
mortgage rate often far outweigh any short-term damage to your credit score.
FICO score does count inquiries, but it's one of the smaller pieces of
the pie," Gaskin says. "The inquiry is less than 10% of the weighting
for your FICO score."
One new credit
inquiry likely won't cause much damage if you have a long history of borrowing,
a solid payment record and a recent past without dozens of inquiries, she says.
"A consumer who
has sufficient experience and hasn't taken on any debt recently, they may not
see any impact at all, or they may see something like (a drop of) five
points," Gaskin says.
In contrast, newer
borrowers might face a slightly higher risk of damage from credit inquiries.
"It's not typically going to be a really substantial impact to a
consumer's score unless they are just brand-new to credit and have been making
a lot of inquiries recently," she says.
Pinning down exactly
how much damage a new borrower's credit score might suffer from multiple
inquiries can be difficult. And the damage will vary from borrower to borrower.
Even so, the impact
should be minor. "Instead of looking like one inquiry, it may look like
two inquiries," Gaskin says.
Your history as a
borrower largely determines how long your credit score will need to heal from
any damage inflicted by multiple inquiries, according to Gaskin.
Checking Your Own Credit Report
Before you begin
shopping for a mortgage, look at your credit report, experts urge. That way,
you can find and correct any errors on the report that might drag down your
score and prevent lenders from offering you the best interest rates.
your own credit report does not damage your credit score in any way.
By federal law, each
person is allowed one free
annual credit report from the three major credit-reporting agencies.
You can get yours by visiting the official website, AnnualCreditReport.com
your credit score could cost you, though a growing number of banks,
credit unions and credit card companies offer free access to scores as a perk
for customers. Even if you have to pay for it, your credit score can help you
choose the best possible mortgage loan.
Advantage of Prequalifying
If you're concerned
about lender inquiries damaging your credit score, consider prequalifying for
mortgages. Prequalification is sometimes referred to as a rate check.
When you prequalify
for a mortgage, the lender estimates how much you could get if you applied for
a loan. Before providing prequalification letters, lenders often check your
Lenders use two
types of credit inquiries:
is a soft credit pull, which does not affect your score, Gaskin says. That's
why prequalification can be a smart option for many borrowers.
"It's a good
first step in the process," she says. "You can visit the lender's
website, put in some information and see what type of offers that they may be
able to make for you."
Usually, lenders want to know basic identifying information,
such as your name and address, along with your annual household income. And a
soft credit inquiry typically goes along with this.
Ulzheimer adds that
prequalifying can be helpful because it sets a price point for home shopping.
"If you can prequalify for $300,000, you shouldn't be looking at $700,000
houses," he says.
prequalification letter does not guarantee that a lender will give you a loan.
is exactly what it says it is: It's a prequalification," Ulzheimer says.
"Whether or not you get a loan is going to be subject to the whole and
entire – and quite invasive – mortgage underwriting process."
A more rigorous
process involving a hard pull of your credit is needed to land a loan, he adds.
"You're going to have to put together a collection of 2 or 3 inches of
paperwork before you actually get a mortgage loan," Ulzheimer says.
Limit Other Borrowing Activity
may not hurt your credit score much, but other types of financial activity can
impair your efforts to take out a home loan. In fact, applying for new credit,
such as a credit card or an auto loan, while you are shopping for a mortgage is
far riskier than ignoring the 45-day window for rate shopping, according to
Don't take on any
new debt before applying for a mortgage loan, he says.
"Wait till you have the keys – wait till the closing is done,"
Ulzheimer says. "If you want to go out and apply for credit, then
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