The Impact of Shopping for a Mortgage on Your Credit
When you start shopping for a mortgage, the process itself isn’t difficult. You find a lender – or two or three – and fill out an application. The lender will check your qualifications and credentials. One of these steps includes checking your credit.
Your credit is a three-digit number that tells lenders how likely you are to pay your bills on time. The ranges vary, but good credit is generally considered to be between 670 and 739.
When a lender checks your credit, this inquiry appears as a hard inquiry. Hard inquiries can lower your score, especially if you have a lot of them. But don’t worry too much – the decrease is usually temporary and won’t make a big difference in the long run.
When shopping for a car loan, mortgage, or similar loans, multiple inquiries made within a short period are grouped together and counted as one hard inquiry. In most cases, if the inquiries are made within a window of up to 45 days, the impact on your credit will be minimized. We’ll discuss this topic further later.
Check Your Credit
To know how to protect your credit, you first need to know what it is. This is a good idea for multiple reasons. First, you’ll be able to see if your score is good enough to qualify for a mortgage. Lenders are not keen on granting loans to those with low scores or no credit history.
You can check your credit for free on multiple sites. You can also get one free credit report a week from Equifax, TransUnion, and Experian until December 2023 at AnnualCreditReport.com.
It’s important to regularly check your credit report. Credit agencies do not always provide accurate information, and if there is something incorrect on your report, you should dispute it. Incorrect information can harm your credit score, particularly if it is negative information.
Consider Prequalification
When it comes to searching for a mortgage, you may want to consider getting prequalified. This is a good option when you are unsure if your credit score is good enough to qualify for a mortgage. Prequalification involves a basic review of your information by the lender and making an offer to you (or not) based on what they see.
It is possible to go through the prequalification process without affecting your credit with a hard inquiry, but you will need to check this on a case-by-case basis with your lender. Just ask them if they will use a soft inquiry, which does not impact your credit score. But remember, if you decide to move forward after prequalification, you will need to complete a hard inquiry.
Maintaining Your Credit
Once you know your credit score, you’ll want to maintain it while shopping for a mortgage. This will allow you to get the best rates and lending opportunities. We spoke with John Kabeil, the Director of Banking Intelligence and Payments at J.D. Power and Associates, for some tips on how to keep your credit score high.
Pay Off Debt
Kabeil recommends paying off any outstanding debts, if possible, to boost your credit score. Do this before applying for a mortgage. Banks use the debt-to-income ratio to determine how much loan they can offer you.
Make Payments on Time
As mentioned earlier, part of your credit score is determined by how consistent your payments are. Even one late payment can negatively affect your score.
Avoid
Getting New Credit Cards or Loans
According to Kabil, you should avoid taking on any new debt before applying for a mortgage loan, including applying for new credit cards and loans. When you do this, it may take several weeks for the changes to reflect on your credit report.
Several things happen when you apply for new loans or a card: a new hard inquiry will be reported, your average credit age will decrease, your credit mix may improve, and your overall credit utilization may decrease.
Limit Your Search to Less Than 45 Days
We previously mentioned that banks will consider multiple inquiries within a certain time frame as a single inquiry. Take advantage of this and shop around for rates from several lenders. Just make sure they all occur within 45 days of each other.
The Consumer Financial Protection Bureau (CFPB) states that “the impact on your credit is the same regardless of how many lenders you consult, as long as the last credit inquiry is within 45 days of the first credit inquiry.” This is because anyone checking your credit score – now or in the future – will realize you’re only looking to buy one home, not several homes as those inquiries might suggest.
According to Kabil, there are some situations – although rare – where extending your loan application for more than 45 days might be advisable.
He said, “For unusual circumstances, an application process that takes months may delay the time you start making payments and improve your score, but those situations are relatively rare.”
According to the CFPB, if you’re looking for a lower mortgage rate after the magical 45-day period, the additional impact on your credit may be worth the money you save in interest in some cases.
Frequently Asked Questions (FAQs)
What are current mortgage rates?
Current mortgage rates vary based on many factors, including location and the type of loan you’re applying for. Check reliable sources like the CFPB to find out current mortgage rates.
How much can I afford for a mortgage loan?
Banks use the debt-to-income ratio to determine how much loan they can provide you. You can calculate this yourself using a mortgage calculator.
What is the credit score required to buy a home?
There are different credit score requirements for different types of loans. For example, Federal Housing Administration (FHA) loans are willing to accept lower credit scores.
How can I improve my credit score?
There are many ways to improve your credit score, including reducing credit utilization and making payments on time.
Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we verify facts and maintain accuracy, reliability, and quality of our content.
Equifax. “What is your credit?”
Consumer Finance Protection Bureau. “What happens exactly when a mortgage lender checks my credit?”
PR Newswire. “Equifax, Experian, and TransUnion extend free weekly credit reports in the U.S. through 2023.”
Consumer Finance Protection Bureau. “Exploring Interest Rates.”
Source: https://www.thebalancemoney.com/how-to-shop-for-a-mortgage-without-hurting-your-credit-5192775
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