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Posted July 16, 2015
in FICO & Credit Scores

How To Shop For Mortgage Rates Without Dinging Your Credit Score

The Debt Totem Pole for Mortgages, Auto, Credit Card and Store Credit debt

Current Mortgage Rates Spark Refinances

Maybe you're curious about whether a refinance is right for you.

It can be tough just getting a plain "rate quote", though. Most lenders wants to "pull your credit" as part of the refinance process.

You're worried it will harm your FICO. Don't be.

In the 1980s, you would have had reason to be concerned. Pulling your mortgage credit scores would have lowered your overall FICO. Today, in 2015, not so much.

The credit bureaus say it plainly -- your credit scores will not drop when a mortgage lender pulls your credit.

Get a complimentary rate quote now.

Credit Pulls : A Fraction Of Your Credit Score

A "credit inquiry" is a formal request to review a person's credit report.

Credit inquiries are a single element within a larger credit-scoring category known as "New Credit". New Credit accounts for 10% a person's overall credit score.

New Credit is the smallest of 5 credit score components.

A consumer's "search for new credit" is relevant to their FICO because when a person makes a credit inquiry, it's a specific request to increase their level of indebtedness.

Assuming new debt increases a person's probability of a default.

This is why credit scores drop when you go looking for new credit cards or charge cards -- each new credit inquiry increases the probability that you're taking on large amounts of debt, which makes it less likely that you'll make good on your payments to your creditors.

Credit inquiries come in many varieties.

  1. A credit check for a purchase or refinance mortgage loan
  2. A credit check for an auto loan
  3. A credit check for a credit card application
  4. A credit check for a store credit card, or consumer loan

Each of these 4 credit check-types receive different treatment by the bureaus.

For example, a credit card application is weighted "worse" than a mortgage loan and can be be more damaging to your total credit score. This is because credit card debts tend to move higher over time, which worsens your overall credit position.

Mortgage debt, by contrast, lowers over time until it reaches $0.

Consumer loans and store credit cards are also weighted worse.

This is because these specific card types are associated with layaway plans and "loans of last resort", which tend to default at very high rates.

Because store credit is considered "bad", then, give careful consideration before opening store credit cards. You may save 20 percent on your purchase, but you may also inflict major, immediate damage on your credit score.

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Mortgage Inquiry Lowers FICO Just 5 Points

Credit pulls can affect your score, but the effect of a mortgage-related inquiry on your credit score is miniscule.

Here's why.

Mortgage lenders rank credit scores using an industry-standard model known as the FICO score which assigns a numerical value to a person's credit risk to a bank.

The lowest possible FICO score is 300. The highest FICO score is 850.

Of a person's score, 65 percent is linked to two part of their credit history -- Payment History, and Credit Utilization. The most weight is assigned to how much money a person borrows from creditors, and whether that person actually paying its creditors back.

It makes sense that two-thirds of a person's score should be linked to these two factor.

Next, 15 percent of the credit score is linked to a person's credit history; the length of time a person has had credit in your name. This, too, makes sense.

It's risky to lend to a "first-timer"; a person who has never had a credit card to his name, or repaid a car loan, or borrowed money for an education.

All things equal, the more time you've spent managing your own credit, the better your score will be.

The next 10% is linked to the type of credit you maintain.

Auto loans and mortgage debt are viewed as "positive" credit types. Store charge cards, by contrast, are treated as "negative" credit types.

The remaining 10% of your FICO score -- or 85 points -- is reserved for "New Credit".

New Credit is an assessment of the (1) new credit accounts you've opened, (2) the types of credit for which you've applied, and (3) how long it's been since you last opened an account. Having a lender check your FICO is just a small event in a larger credit history.

A mortgage credit inquiry is estimated to lower your credit score by just 5 points.

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Shop Multiple Lenders, Get One "Ding" On Credit

With mortgage rates low, you'll want to shop multiple lenders to get your best deal. However, as you'll learn through the process, each lender may want to pull your credit, putting another "hit" on your report.

Thankfully, the FICO system has your back. You won't harm your score when multiple lenders pull your scores. The system is built with consumer protection in mind.

Here's what you need to know.

First -- unlike when you apply for multiple credit cards at one time -- when you apply for a loan with multiple lenders at once, you get dinged for New Credit only once.

This makes sense. When you apply for 5 credit cards, you'll get the option to use all five. With multiple mortgage applications, though, you're applying to get one mortgage.

Furthermore, the credit bureaus like to see some "rate shopping". A consumer who shops for the best mortgage rate is more likely actually get it which, in turn, begets lower rates and payments.

And this leads us to the second important point.

In the FICO scoring model, you are given the right to shop with as many lenders as you like, with a caveat.

So long as you shop for your mortgage within a limited, 14-day time frame, you can have your credit checked by an unlimited number of lenders and have it count against your score just once. The bureaus will acknowledge your first credit, then ignore each subsequent check.

It's a policy that's good for you and good for the credit bureaus. Your credit scores stay high, and TransUnion, Equifax and Experian collect more fees from the banks.

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How To Get The Lowest Mortgage Rates

Mortgage interest rates are low. Whether you're looking to purchase a home or refinance one, shop multiple lenders to find the best combination of mortgage rates and fees to fit your situation.

Also, take a cue from the credit bureaus, which explain how to shop for mortgages to get very low rates :

  1. Want the best rate? As they say, "shop around" for it.
  2. Limit your rate shopping to 14-day timespan to minimize your total credit "dings"
  3. Give up your social security number so lenders can give accurate quotes instead of just guesses

This last point is an important one.

Metaphorically, not letting your lender check your credit is like not letting your doctor check your blood pressure. Sure, you can get a diagnosis when your appointment's over -- it just might not be the right one.

Letting a lender see your credit score can mean the difference between a 3.25% and a 4.25% mortgage rate; a conforming loan and FHA mortgage; or, an underwriting approval or denial.

Get A Complimentary Mortgage Rate Quote

Mortgage rates are low and experts recommend shopping multiple lenders in order to get the best possible rate-and-cost combination for your needs.

Get started with a complimentary mortgage rate quote now. Rates are available at no cost, with no obligation to proceed, and with no social security number required to get started.

Click for today's rates now.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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2015 Conforming, FHA, & VA Loan Limits

Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)