How To Protect Your High Credit Score While You’re 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, you would have reason to be concerned. Today, not so much.
The credit bureaus say it plainly -- your credit scores will not drop when a mortgage lender pulls your credit.
Credit Inquiries : A Fraction Of A Fraction Of Your Credit Score
A "credit inquiry" is a formal request to review a person's credit report.
They are just one small 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.
Searching for new credit is relevant to your credit score because when you make a credit inquiry, it's 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 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.
- 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" 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, eventually pays down to $0.
The same is true for consumer loans and store credit cards. These card types are associated with layaway plans and "loans of last resort". Both credit types with high default rates. These, too, can have a damaging effect on your credit score.
Because store credit is considered "bad", give careful consideration before opening store credit cards. You may save 20 percent on that purchase by starting up the new account, but you may also inflict major, immediate damage on your credit score.
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.
Mortgage lenders evaluate your credit using the FICO scoring model. The FICO scoring model ranks scores from 300-850. 65% of that score is linked to two elements of your credit history -- (1) Payment History, and (2) Credit Utilization.
The credit bureaus give the most weight to how much money you're borrowing from creditors, and whether you're actually paying your creditors back.
That makes sense.
The next 15% of your credit score is tied to your credit history; to the length 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"; a person who has never had a credit card to his name, or repaid a car loan, or borrowed money for an education.
Then, the next 10% 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.
The credit bureaus have found that people with high numbers of charge cards tend to default more often then people with traditional credit cards. As a result, people with high numbers of charge cards tend to show lower credit scores than people with no charge cards at all.
The remaining 10% of your 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.
Because FICO is a 850-point scale, 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. The trick, though, is to shop for your mortgage within a limited, 14-day time frame. If you can manage that, the credit bureaus will acknowledge your first credit pull as a "ding", but will ignore each subsequent check.
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, 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
Note this last point -- it's important.
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 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.