Credit Score Basics: Does Mortgage Shopping Affect Your Credit?
Understanding Credit Score
Your credit score represents your creditworthiness. This numerical expression is an evaluation of the potential risk you pose to lenders, which in turn determines if you qualify for a loan. Your credit score also impacts the specific terms of your loan, such as interest rates, credit limits, and mortgage insurance. This information is aggregated from your financial history by credit bureaus.
Mortgage Shopping: Impact on Credit Score
When shopping for mortgages, new home buyers often inquire about rates, but request that the bank or broker forgo pulling their credit. While it is prudent to consider the risk of hard inquiries (explained later in the article), there is usually nothing to worry about unless you’re doing some seriously overzealous bargain hunting.
When you’re looking for a mortgage and your credit is pulled, you have a certain time frame wherein credit bureaus acknowledge that you’re shopping around for the best rates and your credit score is not affected. This is accomplished by determining what kind of credit checks have been requested. Using the old FICO formula, this period typically lasts for two weeks. However, most lenders are using a more recent method to define this time frame, which has increased the range from 30 to 60 days.
During this window, credit bureaus will notice the latest pulls have been for mortgages, and they’ll treat these inquiries differently than say, applying to a variety of credit cards. Although you may have numerous banks and mortgage companies requesting a copy of your credit report, FICO Scores disregard inquires made in the 30 days prior to scoring. This is because if you were to apply for multiple credit cards, there would be a possibility of accruing debt on each card. When you’re mortgage shopping, you’re usually looking for just a single loan.
Credit Check or Credit Inquiry: What Is It?
When you begin mortgage shopping, you will authorize your bank or broker to request a copy of your credit report from a credit bureau. Credit checks for auto loans and mortgages may cause a slight dip in your credit score while you’re shopping around. Generally, with one hard inquiry, your credit score will dip two to four points (but remember: only once).
Hard Inquiry: A Deep Dive
Credit inquiries are classified as either “hard inquiries” or “soft inquiries.”
Hard Inquiries: These requests are made by potential lenders and businesses like insurance companies, mobile phone companies, or mortgage brokers who are reviewing your creditworthiness. These inquiries are typically made when you’re applying for an auto loan, mortgage, or credit card.
Soft Inquires: These requests are made when you’re checking your own credit, or by businesses looking to offer you promotions, goods, or services.
Checking your own credit will not affect your score, but paying late or opening multiple accounts can.
The Importance of Shopping Around for Mortgages
Remember, your credit score is constantly fluctuating. For example, if you have multiple credit cards, each with different balances, and are in the process of paying off an auto loan, your number will be ever-changing. This small two to four point dip isn’t meant to deter you from shopping around, it’s there in case various kinds of credit pulls are made and to ensure that your FICO Score can account for this increased risk. Again, if you have strong credit, a two to four point decrease isn’t going to hurt you. You’re better off shopping around and finding a good deal with better rates and lower fees than not checking and signing a mortgage that doesn’t suit your needs.
By and large, you get your best rates and mortgage insurance over a 740 credit score.
Why Choose a Mortgage Broker?
It’s certainly a good idea to do some preliminary research first, but ultimately, you should find a mortgage broker who will check multiple banks and different programs for you. Any fee is worth the unbiased and valuable information that you’ll receive, and in a fraction of the time that it would take to do it alone. In a lot ways, this is the safest, most economical method of finding the loan that’s right for you.
Feel comfortable allowing your mortgage broker to pull your credit. It’s the only surefire way to get an accurate quote for your specific needs and financial history. A good mortgage broker will not only provide you with evenhanded feedback during your search for a loan, but will also compare multiple institutions to find you the best options at the rates that work for you.
A good mortgage broker will not only provide you with evenhanded feedback during your search for a loan, but will also compare multiple institutions to find you the best options at the rates that work for you.
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