How to Shop for a Mortgage Without Hurting Your Credit
Whether you’re buying a new home or refinancing an existing mortgage, shopping around for a good interest rate might save you money. At the very least, rate shopping can help you confirm you’re getting a good deal.
But there’s an art to shopping for a mortgage if you want to protect your credit scores at the same time. You should limit your rate shopping to a short window of time — ideally two weeks or less. Otherwise, your credit scores might suffer because of too many credit inquiries.
Credit Inquiries and Your Credit Scores
Anytime a credit bureau lets someone access your credit information, a record of that access is added to your credit report. This record is known as a credit inquiry.
Some credit inquiries are "soft," and will never harm your credit scores. For example, you can check your own credit as often as you like with zero fear of score damage.
Other credit inquiries are "hard." Hard inquiries most commonly occur when you apply for new credit or services. Unfortunately, a hard inquiry does have the potential to damage your score.
Special Treatment for Certain Hard Inquiries
Not all hard inquiries hurt credit scores. It’s possible for a lender to check your credit without any score impact whatsoever.
FICO Scores in particular give special treatment to hard inquiries in certain circumstances. (This special treatment is reserved for mortgage, auto loan, and student loan inquiries only.)
1. FICO Scores ignore mortgage, auto, and student loan inquiries for the first 30 days they appear on your credit report.
2. If multiple mortgage, auto, or student loan inquiries fall within a 45-day window (sometimes less), FICO Scores combine them together and count them only once. This process is known as de-duping.
Different Scores Treat Inquiries Differently
You only have three credit reports (Equifax, TransUnion, and Experian). Yet you have hundreds of credit scores. There are different brands of credit scores, like FICO and VantageScore. There are industry-specific scores, like FICO Auto and FICO Bankcard. Finally, there are different versions of scores too (FICO 2, FICO 4, FICO 5, FICO 8, FICO 9, etc.).
Each lender decides the credit score it will use to evaluate loan applications. When FICO releases a newer version of its scoring model, the same lenders evaluate whether they want to change models or stick with the version they already purchased.
In the mortgage world, however, lenders don’t have much choice about the credit score they use to predict risk. Instead, the GSEs (government sponsored enterprises) like Fannie Mae and Freddie Mac call the shots.
Thanks to GSE requirements, a mortgage lender must currently use a much older version of the FICO Score to assess risk. According to FICO, the most widely used credit scores in mortgage lending are as follows:
· Experian: FICO Score 2
· Equifax: FICO Score 5
· TransUnion: FICO Score 4
Newer FICO scoring models allow for a 45-day rate shopping window. Yet older versions of FICO Scores, like some of those used in mortgage applications, only provide a 14-day de-dupe period for rate shopping.
Keep Inquiries in Perspective
The mortgage process takes some time to complete. Your loan officer may need to check your credit when you apply and again before closing. Yet you shouldn’t let an extra hard inquiry or two be a cause for alarm, especially if your credit scores are in good shape.
Hard inquiries can affect your credit scores. However, they’re not as significant as other scoring factors. With FICO, for example, inquiries can only influence 10% of your scores. You shouldn’t apply for new credit carelessly, of course. But you don’t have to be afraid to have your credit pulled when it’s important.
If you have more questions or need help improving your credit, Lisa can connect you with a reputable lender.