Keep Your Credit Score High While Shopping For A Mortgage
So, you're shopping for a mortgage. Your lender wants to "pull your credit". You're worried it will harm your FICO.
30 years ago, that concern was valid. Today, it's not.
The credit bureaus say it plainly -- your credit scores won't drop when a lender pulls your credit.
Credit Inquiries Are A Formal Process
A "credit inquiry" is a formal request to review a person's credit report.
Credit inquires are just one element of a credit-scoring category known as "New Credit". New Credit represents 10 percent a person's overall credit score.
Searching for new credit can harm your credit score because the credit inquiry is a specific request to increase your level of indebtedness. Taking on additional levels of debt increases the probability of a default. This is why credit scores drop when you go looking for new credit -- each new inquiry is a threat to everyone on your credit report.
Credit inquiries come in many varieties and not all of them are considered "bad". Instead, credit bureaus isolate just four types of inquiries as being "a search for new credit".
- A credit check for a mortgage loan
- A credit check for an auto loan
- A credit check for a credit card application
- A credit check for a store credit card, or consumer loan
Not surprisingly, each of these 4 credit check-types receive different treatment by the bureaus. For example, a credit card application is weighted "worse" and can be be more damaging to your overal credit score than can a mortgage application. This is because credit card debts tend to revolve higher over time; worsening your credit position. Mortgage debt, by contrast, eventually pays down to $0.
For this reason, all things equal, credit card applications harm your credit score more than mortgage applications.
A Mortgage Inquiry Lowers Your FICO By 5 Points
Even still, the effect of a mortgage inquiry on your credit score remains tiny. Here's why.
The official FICO scoring model is runs from 300-850 and 65% of that figure is tied to two things -- (1) Payment History, and (2) Credit Utilization. The credit bureaus give the most weight, in other words, to how much money you're borrowing from creditors, and whether or not you're paying your creditors back.
That makes sense.
The next fifteen percent is tied to your credit history; to the amount of time you've had credit in your name. The more time you've spent managing your own credit, the better your score will be. This, too, makes sense -- it's risky to lend to a "first-timer" who's never had a credit card, paid a car loan, or borrowed money for an education.
Then, the next ten percent is linked to the type of credit you maintain.
Auto loans and mortgage debt are viewed as positives in this regard. Store charge cards are viewed as a negative. These positives and negatives are based on default rates from tens of millions of other borrowers. What the credit bureaus have found is that people with high numbers of charge cards tend to default more often then people with traditional credit cards, for example.
So, what's left in the 850-point FICO scale is the 10% reserved for what's known as "New Credit".
New Credit is an assessment of the new credit accounts you've opened, the types of credit for which you've applied, and how long since you last opened an account. At maximum, New Credit is worth 85 points to your FICO. Having a lender check your credit score can only affect a small portion of that figure.
A mortgage credit inquiry is estimated to lower your credit score by just 5 points.
Shop Multiple Lenders, Get One "Ding" On Credit
When shopping lenders and taking credit checks, you're going to lower your credit score. It's how the system works. However, there's a right way and wrong way to move forward.
The first important concept is that -- unlike applying for multiple credit cards -- when you apply multiple mortgages, you won't get dinged for multiple, consumer-initiated inquiries. This is because when you apply for 5 credit cards, you'll likely get the option to use them all five. By contrast, with the mortgage applications, you'll only get an approval once.
As such, the credit bureaus have made it formal policy to permit "rate shopping". In fact, it's encouraged, and this leads us to the second important FICO-protecting concept.
You have the right to shop with as many lenders as you like, but to prevent your queries from harming your FICO, you'll want to shop your loan within a limited, 14-day time frame. If you do, the credit bureaus will acknowledge your first credit pull, and will ignore the subsequent ones.
This means that you can have your credit checked by an unlimited number of lenders within a 2-week period, enabling you to compare mortgage rates and fees ad nauseum. And, no matter how many credit checks you do, all of the mortgage inquiries get lumped into a single credit score hit.
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.
Advice : How To Get The Lowest Mortgage Rates
The credit bureaus do a terrific job of explaining how you can exploit the mortgage process to get very low rates :
- Want the best rate? As they say, "shop around" for it.
- Limit your rate shopping to 14-day timespan to minimize your total credit "dings"
- Give up your social security number so lenders can give accurate quotes instead of just guesses
And, this last point is the 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.
Your credit scores can mean the difference between a 3.25% and a 4.25% mortgage rate; a conforming mortgage and an FHA mortgage; an underwriting approval and an underwriting denial.
Start your shopping and do it right. See today's low mortgage rates.