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Shop for mortgage rates without lowering your credit score

Gina Pogol
The Mortgage Reports editor

How to get low mortgage rates while maintaining your credit score

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

Whether you are a first-time home buyer or a seasoned real estate investor, it’s smart to shop for your mortgage rate.

It’s a fact of life in lending: The mortgage company with the lowest mortgage rate today may not be the one with the lowest mortgage rate tomorrow.

Whether you’re looking to purchase a home or refinance one, then, plan to comparison shop to find the best combination of mortgage rates and fees to fit your situation.

Get started mortgage rate shopping here. (Dec 14th, 2018)

In this article:


Mortgage shopping, step by step

Here’s what to do:

  1. Shop around. Talk to at least two lenders, maybe even five or more
  2. Limit your rate shopping to 14-day timespan because that’s what the credit bureaus allow
  3. Check multiple sources for quotes — retail banks, mortgage brokers, online lenders, and whatever else you can find. You never know where the “best rates” may be today

Lastly, though, and this is the most important point of all — make sure to share your social security number with your lenders so they can give you accurate mortgage rate quotes instead of just best guesses or “ballpark rates.”

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

Start shopping for a mortgage rate here. (Dec 14th, 2018)

How credit scores affect mortgage rates

Mortgage rates and credit scores are related. The higher your score, the better your rate — to a point. Fannie Mae, for instance, prices its loans in tiers — 620 to 639, 640 to 659, and so on. So a borrower with a 660 FICO might get a much better deal than one with a 659 score.

That means raising your FICO score by one single point could save you thousands. And anyone has the power to raise their scores by one-to-20 points for a better deal.

Making things a little more complicated, though, is the fact that not all mortgage lenders use exactly the same version of the FICO score. So on one hand, shopping aggressively may get you a better quote, and you may find a lender that uses a more generous version of the FICO score (there are about 50 different FICO scores these days).

On the other hand, one factor that can drop your score is the number of inquiries — the number of companies pulling your credit report. Fortunately, improvements to the FICO system have minimized the effect, as the company recognized that shopping for a single mortgage is not the same as applying for 15 credit cards.

What is a credit pull or “hard” inquiry vs. soft credit check?

A “credit pull” or “hard inquiry” is a formal request to review a person’s credit report. It requires the permission of the consumer.

This is different from the “soft” inquiry in which a company might get a list of consumers who fit a certain profile and use that information to market to them. You probably get offers of this type every week. Relax; those companies do not have your personal information and their request did not affect your credit score.

Mortgage credit pulls vs credit card inquiries

But a hard inquiry does mean you’re searching for additional credit. Statistically, you’re more likely to have debt problems and default on financial obligations when you increase your available credit. This is especially true if you’re maxed out or carrying credit card balances and looking for more.

Understanding this, it makes sense that your credit scores drop when you go applying for new credit cards or charge cards. Fortunately, credit bureaus have learned that mortgage shopping behavior does not carry the same risks and they no longer treat a slew of mortgage inquiries the same way.

If you allow multiple mortgage companies to check your credit report within a limited period of time, all those inquiries will be treated as a single inquiry. That time period depends on the FICO system the lender uses. It can range from 14 to 45 days.

What FICO says

This is what MyFICO says about its algorithms and how it treats rate shopping inquiries:

FICO® Scores are more predictive when they treat loans that commonly involve rate-shopping, such as mortgage, auto, and student loans, in a different way. For these types of loans, FICO Scores ignore inquiries made in the 30 days prior to scoring.

So, if you find a loan within 30 days, the inquiries won’t affect your scores while you’re rate shopping. In addition, FICO Scores look on your credit report for rate-shopping inquiries older than 30 days. If your FICO Scores find some, your scores will consider inquiries that fall in a typical shopping period as just one inquiry.

For FICO Scores calculated from older versions of the scoring formula, this shopping period is any 14-day span. For FICO Scores calculated from the newest versions of the scoring formula, this shopping period is any 45-day span. 

Mortgage credit pull means a 5 point hit

Credit pulls for loans will affect your credit score in time, but the effects of a credit pull will vary by creditor type. As compared to other credit applications, pulling your credit will do almost nothing to your credit score.

Here’s why.

Mortgage lenders usually rank applicants using an industry-standard model known as the FICO score. This model assigns a numerical value to a person’s credit risk to a bank. Scores range from 350 to 850.

Mainstream mortgage programs typically have minimum FICO scores of 620 to 680. Government-backed loans are more flexible (VA, for instance, has no official minimum credit score). And non-prime lenders may let you go as low as 500 with a big down payment and a high interest rate.

65 percent of the credit score is linked to just two components — credit utilization and payment history. That means the percent of available credit that you use (experts commonly recommend keeping that at 30 percent or lower), and how often you do (or don’t) pay your bills within 30 days of their due dates.

It makes sense that two-thirds of a person’s credit score is tied to these two behaviors. They’re important ones.

The rest of your score is driven by

  1. The number of new accounts (this is related to inquiries, and opening a bunch of new credit cards before applying for a mortgage is a very bad idea)
  2. Your credit mix (certain kinds of credit, like mortgages, are seen as positive while having nothing but store credit cards and payday loans will hurt you)
  3. The age of your credit history (a longer track record of good debt management makes you statistically more likely to pay your debts as agreed)
Compare lender quotes. Start here. (Dec 14th, 2018)

Compare quotes from multiple lenders without fear

How to get the best mortgage rate? Get multiple quotes from competing mortgage lenders. Give them all the same information — your loan amount, down payment, loan type, and estimated credit score. The lenders will probably offer you a worksheet, a scenario, or a Loan Estimate (LE). These will show you the rate and terms they offer.

You can even simplify the process by telling all the lenders what interest rate you want and simply choose the one with the lowest costs, or tell them all what costs you want to pay and choose the lender with the lowest rate. But they’ll all want to know your credit score to give you an accurate quote.

The lenders will probably come up with different scores and different offers. If you find one lender’s scoring model puts you in a lower credit tier, you don’t have to accept that. You can have as many credit pulls as you like within 14 days, and maybe as many as 45 days.

Rate shopping for refinance applicants

Refinance applicants have the most to gain when shopping for a mortgage rate. They certainly shouldn’t be shy about it.

Apply online or over the phone with five to 10 lenders. Choose the best rate and fee structure until you’ve received your best deal.

Lenders love refinance applications: they close quicker and are much easier to process than most home purchase ones. Use that to your advantage.

There’s no penalty for applying for even dozens of lenders within a 14-day window. That’s plenty of time to receive multiple quotes and choose the best one.

Mortgage rate shopping / credit score Q&A

Do mortgage pre-approvals affect credit score?

Yes, but only slightly. Credit bureaus penalize you a small amount for shopping for credit. That’s a precaution in case you are trying to solve financial problems with credit. But requesting a mortgage pre-approval without applying for other types of credit simultaneously will have little to no effect on your score.

Will shopping around for a mortgage hurt my score?

You have 14 days to get as many pre-approvals and rate quotes as you’d like — they all count as one inquiry if you are applying for the same type of credit.

How many points does your credit score go down for an inquiry?

About 5 points, but that could be lower or higher depending on your credit history. If you haven’t applied for much credit lately, a mortgage inquiry will probably have a minimal effect on your score.

How much does a mortgage affect credit score?

Having a mortgage and making all payments on time actually improves your credit score. It’s a big loan and a big responsibility. Managing it well proves you are a worthy of other types of credit.

What’s the mortgage credit pull window?

You have 14 days to shop for a mortgage once you’ve had your credit pulled. Within 14 days, all mortgage inquiries count as one.

Bottom line

A mortgage credit inquiry does have a small effect on your score, but it’s still worth shopping around. You can save thousands by getting multiple rate quotes and making lenders compete for your business. And, multiple inquiries only counts as one, so you might as well shop if you’ve already had one lender pull your credit.

What are today’s mortgage rates?

When you’re shopping for a mortgage, you should really shop for a mortgage. Thankfully, the credit bureaus make this less frightening by providing credit score protection to mortgage rate shoppers nationwide. You won’t affect your FICO when you’re only after lower mortgage rates.

Get today’s live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.

Start mortgage rate shopping here. (Dec 14th, 2018)

 

 

 

Verify your new rate (Dec 14th, 2018)