How shopping for a mortgage affects your credit is a top concern for many first-time homebuyers. For the most part, this concern is overblown... if you take the right precautions.
That said, it is possible that your credit score could take a hit when you shop for a mortgage. However by learning a few key facts about credit scoring (more specifically, FICO Scores), you can mitigate or eliminate any impacts on your credit profile.
How Do Credit Inquiries Affect My Credit Rating?
First, let's define "Credit Inquiries."
Credit inquiries occur when an institution (bank, business, etc.) makes a request to credit reporting agencies. Whenever you apply for credit. you authorize the lender to request a copy of your credit report from a credit reporting agency. These inquiries may affect your credit rating. But there’s good news:
Only “hard inquiries” have a noticeable impact on your score. “Soft inquiries” have no impact.
But what exactly is the difference between a hard and soft inquiry?
- Soft inquiries refer to standard actions that won’t impact your credit rating. For example, when your bank receives the updated FICO Scores of all its customers as part of a routine credit quality check, that’s a soft inquiry. Your cable, Internet or utility provider will also pull a soft inquiry before setting up your account.
- Hard inquiries are when an organization pulls a full credit report on you. When you purchase a car from a dealership, for example, you’ll be asked to perform a credit check. Another common example is when you contact your credit card company to ask for a credit line increase. Since you are requesting more credit, this will have an actual impact on your overall FICO Score.
The Importance of FICO Scores
That three-digit number you see on your credit report is called a FICO score. The number is calculated based on the information contained in your reports; it signals how likely you are to repay a loan, and how much you can borrow.
The full FICO Score range is 300-850, with 850 being the top score. Each hard inquiry deducts several points from your score. The more hard inquiries you have, the more points you lose. Naturally, this affects how much money you can borrow.
For most borrowers, an additional credit inquiry only subtracts about 5 points from the overall FICO Score. Inquiries also only make up for 10% of the total credit risk assessment. Other factors have a greater impact when assessing credit risk, such as timely bill payment and the borrower’s overall debt burden.
How Does Mortgage Rate Shopping Affect My Credit Score?
Generally, running multiple hard inquiries at once will lower your credit rating. A prime example of this is when someone applies for several credit cards at once. You may think that this also applies when running several mortgage rate inquiries, but we’ve got some good news:
You don’t have to worry about multiple inquiries for auto, mortgage or student lenders if you run them within a certain time frame. Inquiries run within the allowed timeframe will be treated as a single inquiry and don’t impact your score.
Also, remember that the exact impact a hard inquiry has on your credit score varies from person to person. Even if you have a bit of debt, your rating will still fare well if you keep the mortgage rate shopping period short and concise.
By now, you’ve probably realized that shopping for a mortgage rate isn’t going to impact your credit rating too heavily. Still, many home buyers want to minimize the impact as much as possible. Follow these tips to ensure that your score remains squeaky clean:
Shop Within a Short 14 to 45-day Timeframe: Don’t let your search drag on. A mortgage shopping period of 14-45 days is optimal. Since multiple mortgage inquiries in this time frame don’t impact your rating, you can take advantage of a focused period to get the best rate.
Pull Your Own Credit Reports & Check for Errors: According to a study by the Federal Trade Commission, one in five people has an error on at least one of their credit reports. Since lenders look at certain aspects of your credit history and financial situation, you want to make sure you clean up any errors that could impact you negatively. You can (and should) get a free copy of your credit report every 12 months from each credit reporting agency. If you find any errors, dispute them ASAP.
Get Pre-qualified: Pre-qualification is a lender’s estimate of how much you can afford based on the financial information you provide and is not considered a hard inquiry. Most real estate experts recommend getting pre-qualified before you even start shopping for a home.
Reduce Your Credit Card Debt:When it comes to credit scoring, the less debt you have, the better. You can speed up the process of reducing or eliminating credit card debt by making more than the minimum monthly payments on your cards.
Don’t Apply for New Credit: It’s best to hold off on applying for any auto loans or new credit cards until you’ve locked down your mortgage rate. When your credit report looks as clean as possible, there will be fewer red flags for lenders.
Shopping for a mortgage is an exciting step that puts you one step closer to being a homeowner. By understanding how mortgage shopping plays into your credit score and taking the right steps, you can avoid any negative effects.
If you need any further advice on keeping your credit rating clean while you shop for mortgages, book a consultation with one of our mortgage experts by clicking the button below.