Shopping around to make sure you find the best deal on a loan is smart. Getting the best interest rate and terms possible, could save you thousands or even tens of thousands of dollars over the life of a mortgage loan. A home loan is unique like you and I … so its best find a lender where you can explore what kinds of options might be out there.
Each time you apply for a home loan, a mortgage lender will make a credit inquiry to review your credit history. These inquiries are reported to the three major credit-reporting agencies: Equifax, Experian and TransUnion. Because inquiries signal that you are thinking of taking on new debt, your credit score can dip. But the good news is that the damage from multiple credit checks by mortgage lenders is typically small.
That being said, it’s best to keep your interest rate shopping limited to a short window of time if your credit reports are being pulled as part of the process. There is a chance that rate shopping could have a negative impact on your credit scores.
What is a credit inquiry?
An inquiry is a record of access into your credit profile. So, when you apply for credit, the credit bureaus are going to make a record of who accessed your credit report and when, and place that record on your report.
Some inquiries, such as checking your own personal credit, do not affect your score. These are referred to as “soft” inquiries. Other inquiries, such as applying for new credit, such as a car, credit card or home loan have the potential to impact your scores negatively. These are referred to as “hard” inquiries.
The sole reason the credit scores exists is to help lenders predict risk. And research shows that applying for multiple new accounts in a short period of time is predictive of elevated risk.
Due to this fact, credit scoring models like FICO and VantageScore are designed to pay attention to the number of hard inquiries on your credit reports when calculating your scores. And a larger number of hard inquiries could translate into lower credit scores in some cases.
The exception to this rule is when you’re rate shopping. Your credit reports could easily get polluted with multiple hard inquiries in a short period of time when you’re trying to find the best financing offer available. But credit inquiries that occur as a result of rate shopping are not indicative of the same elevated risk mentioned above.
As a result, credit scoring models often treat them differently — provided that those inquiries all occur within a certain window of time and are from certain types of lenders. Both FICO and VantageScore scoring models include logic that protects your scores from the impact of rate shopping inquiries.
Shopping window within 45 days
In the FICO model, multiple credit inquiries within a 45-day window are treated as one shopping event, provided those inquiries are from mortgage, auto loan or student loan lenders.
For example, FICO can see you are rate shopping for a home loan, so they will count as one inquiry, as long as the applications all take place within their 45-day window.
Inquiries outside of the three categories mentioned above, such as credit card inquiries, are not protected, because consumers don’t typically shop around for the best rate on a credit card.
Be mindful of your credit applications and only make a credit inquiry when necessary.
Even if you have a few credit inquiries that are counted against your scores, we’re talking about a minimal number of points deducted, and even that impact will disappear within a year. Credit is cyclical and within a few months, your score will bounce back a little, as long as there aren’t other negative factors on your credit report. So, keep the hard inquiries down to a minimum to minimize the small effect they do have on your credit report.