Does Shopping Around For a Mortgage Hurt Your Credit?
Written by Jason Nelson on November 7, 2016
When purchasing a home, shopping around for the lowest interest rate can save a borrower thousands of dollars over the life of the loan. Yet many home buyers are worried that looking for the best deal on a mortgage, which inevitably involves multiple credit inquiries from different lenders, will hurt their credit scores. Since a lower credit score usually means a higher interest rate, people tend to think there’s no point in looking for the best deal on a mortgage. That’s one of the reasons why an overwhelming majority of borrowers end up paying ridiculously high interest rates on their home loans.
How Rate Shopping Affects Credit Scores
We cannot deny it: credit inquiries can hurt your credit rating. But the actual effect of these inquiries depends upon the credit situation of each person. As an example, several inquiries might have a small impact on the credit score of an individual who has multiple accounts and a good credit history. Conversely, just one inquiry can be too much for a mortgage applicant with a low credit score. Besides the number of inquiries, some of the factors that can hurt your credit score are the number and type of accounts you have; the period of time since the most recent account openings; and the time frame during which the credit checks have been completed.
Types of Credit Inquiries
Currently, there are two types of credit checks: “hard” inquiries and “soft” inquiries. Hard inquiries are performed by lenders in response to applications for credit. Soft inquiries aren’t tied to credit and occur when the person himself, a financial institution with whom he already has a credit account, or an employer checks the credit score as part of a background check. Unlike “hard” inquires, “soft” inquiries don’t hurt your credit rating.
The extent of credit score damage resulting from “hard” inquiries depends not only on how many credit checks are performed but also on the types of credit a person applies for. Experian, Equifax and TransUnion allow a window period for credit inquiries associated with the same type of loan. By way of example, FICO scores aren’t affected by multiple credit checks done by different mortgage lenders, as long as all the inquiries occur within a 14-, 30- or 45-day period. The shopping period depends on the FICO scoring formula chosen by each lender. The credit checks performed within the stipulated time frame are viewed as a single inquiry and usually take less than five points off FICO scores.
Since shopping around for the best terms on a mortgage can harm credit scores, a potential loan applicant must ensure his credit rating is high enough to allow for multiple mortgage inquiries. Otherwise, a few “hard” inquiries can lower a person’s credit score to the point when he might no longer be able to qualify for a mortgage.
How to Shop for a Mortgage without Hurting the Credit Score
Some lenders allow home buyers to find out if they can qualify for a mortgage before actually applying for a particular loan product. Applicants can purchase their credit scores directly from a credit reporting agency and do some research on their own to learn about the terms and conditions available for people with certain credit profiles. For example, if you know your credit score, you can contact us at North Florida Mortgage or use our online form to see if you qualify for one of our loan programs. Doing this won’t hurt your credit score.
Though home buyers shouldn’t let the fear of losing a couple of points keep them from shopping around for the best interest rates, they need to be cautious and shop wisely. To learn how to go about the home buying process responsibly and make the most of comparison shopping without causing irreparable damage to your credit profile, please fell free to get in touch with our mortgage professionals today.