Are you shopping for a mortgage loan, but worried about pulling your credit report multiple times?
This is one of the most common questions we receive with regard to credit scores when potential homebuyers are shopping for a mortgage. Smart borrowers want to talk to several mortgage companies and banks to find the most favorable terms. Finding the right lender and shopping around for the best mortgage will most likely save you a great deal of money on closing costs and on your monthly payment.
The drawback for most borrowers is the hesitancy to have their credit pulled multiple times.
Inquiries and Their Effect On Your Credit Score
Credit scores are calculated from a formula that measures the way a person handles their debt. The more responsible a person is about paying bills on time, keeping credit card balances low, and managing their credit in general, the higher their credit score. The formula that calculates your credit score not only factors in such things as your bill-paying history and the number and type of loans you have, but also calculates in the number of times in the recent past you’ve allowed your credit to be pulled. This is called an inquiry. So, typically if your credit report is accessed several times, it could lower your score.
Since new debt is only 10% of your total credit score and a smaller portion of the score than your payment history or your debt balances, you aren’t going to see a significant decrease in your score from multiple inquiries. However, sometimes a 5- or 10-point drop in your score makes the difference in qualifying for the loan you seek. You should avoid applying for credit frivolously, especially just before you start home shopping, and save your inquiries for when you really need to use them.
What Is A Mortgage Inquiry?
When a mortgage lender pulls your credit, it’s noted on your credit report as a mortgage inquiry. This flags the credit scoring system that you are in the market for a mortgage. This inquiry gets applied to your credit report and your score, just like any other credit inquiry, as a hard inquiry. This means that it can have an effect on your credit score.
So, if you allow five mortgage lenders to pull your credit, does that mean that you have five inquiries impacting your credit report? No, it does not.
The 45-Day Window for Mortgages
Credit scores look at new debt to help determine a person’s credit worthiness, with the expectation that one inquiry results in one line of credit. However, even though you may have multiple mortgage inquiries in the span of a few weeks, you’re still only shopping for one home. That’s why the credit score model builders added a 45-day shopping period for mortgages. As long as you do your mortgage shopping within that 45-day window, your credit report will be impacted as though only one hard inquiry was made.
For example, let’s say that John needs a mortgage and he has his credit pulled on May 1, May 16, June 2, and June 11. While those are four separate credit pulls, they only count as a single inquiry on his credit score because they were pulled within 45 days of each other. While every inquiry will show up on John’s credit report for informational purposes, only one inquiry counts against his credit score. This allows John to talk to several lenders and make the best decision possible about his mortgage loan.
Andy Munsey, Digital Sales Manager for MIG, explains, “Anyone who is in the process of purchasing a new home and shopping for a mortgage should take advantage of the 45-day window for shopping, which is allowed by the CFPB. Doing so could save up-front in closing costs and potentially thousands more over the life of the loan in interest charges.”
Other Important Credit Report Information
Before you apply for a mortgage and agree to let multiple lenders pull your credit, you should pull your credit report on your own. Doing so allows you to note any errors and make any adjustments, all of which have no effect on your credit score. This also allows you to dispute them with the credit bureaus immediately.
If you need assistance with understanding your credit report, every loan officer at MIG reviews the credit report with their clients at no additional charge, so homebuyers understand everything that is being reported, what it means, and how it impacts their credit score.
There are a variety of decisions to make when you’re trying to find a mortgage loan, but talking with more than one lender shouldn’t be one of them. There’s no valid reason to worry about your credit being pulled more than once, as long as you stay within the 45-day shopping window for mortgage loans. Choosing the right lender is crucial to a smooth closing as well as being able to save money on interest rates.