Shopping for a Home Loan Without Impacting Your Credit Score
There is much convoluted information about credit scoring in the marketplace today. In particular, what impacts the credit score & what activities can have detrimental impacts on those scores. An educational read on how to shop for a mortgage effectively without lowering your scores.
via US News and World Reports
How to Shop for a Mortgage Without Hurting Your Credit Score
Compare mortgage rates within two weeks to limit credit damage.
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.
Shopping 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.
Multiple 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 bureau Equifax.
"It really 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.
Mortgage 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.
"The 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. Fortunately, checking 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.
Checking 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.
Take 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 credit.
Lenders use two types of credit inquiries:
A hard inquiry, or hard pull. Typically, hard inquiries occur when lenders look at your credit report after you have applied for credit. A hard inquiry often has a negative effect on your credit score. Lenders may do a hard inquiry when you request a preapproval or submit a formal application as you are mortgage shopping.
A soft inquiry, or soft pull. Lenders use less rigorous soft inquiries for prescreening your credit file. Soft inquiries do not affect your credit score.
A prequalification 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.
Meanwhile, a prequalification letter does not guarantee that a lender will give you a loan.
"Prequalification 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
Mortgage shopping 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 Ulzheimer.
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 fine."