When it comes to buying a home, one of the most important steps is securing a mortgage. For most people, this process is accompanied by a lot of questions, and one of the most common is whether checking your credit scores during mortgage shopping can lower them. This concern is understandable, as a person’s credit score is a crucial factor in determining the terms of their mortgage. But how does this process actually work, and what impact does it have on your credit score? In this essay, we’ll explore the relationship between mortgage shopping and credit scores, clarify common misconceptions, and provide practical advice for prospective homebuyers.
Understanding Credit Scores and Inquiries
To begin, it’s important to understand how credit scores are calculated and the role that inquiries play. Credit scores, such as those from FICO or VantageScore, are numerical representations of an individual’s creditworthiness. They are calculated based on various factors, including payment history, amounts owed, length of credit history, types of credit in use, and new credit inquiries.
When you apply for credit, such as a mortgage, the lender typically requests your credit report from one or more of the major credit bureaus (Equifax, Experian, and TransUnion). This request is known as a credit inquiry. There are two types of credit inquiries: “soft” and “hard.” Soft inquiries occur when you check your own credit score or when a lender checks your score for pre-approval offers. These do not affect your credit score. Hard inquiries, on the other hand, occur when you apply for credit and the lender pulls your report to make a lending decision. These inquiries can have a slight impact on your credit score.
The Myth of Credit Score Reduction During Mortgage Shopping
One common misconception is that every time you check your credit score while shopping for a mortgage, your score will drop. This is only partially true. As mentioned earlier, checking your own credit score is a soft inquiry and has no impact on your score. However, when a lender checks your credit during a mortgage application, it results in a hard inquiry, which can indeed cause a small, temporary dip in your credit score.
That said, there’s a crucial detail to understand: the credit scoring models used by FICO and VantageScore recognize that consumers often shop around for the best mortgage rates. To prevent this from unfairly penalizing consumers, these models treat multiple mortgage inquiries within a short period as a single inquiry. This period is typically 14 to 45 days, depending on the specific scoring model used. Therefore, if you are shopping for a mortgage and have multiple lenders check your credit within this window, it will only count as one inquiry, minimizing the impact on your credit score.
The Reality: Minimal Impact from Mortgage Shopping
In reality, the impact of mortgage-related credit inquiries on your score is generally minimal. According to FICO, a single hard inquiry can lower your credit score by about five points or less. However, the effect diminishes over time, and the impact of multiple inquiries during mortgage shopping is even less significant due to the previously mentioned “shopping window” rule.
Moreover, the importance of credit inquiries in your overall credit score is relatively small. The majority of your score is based on other factors, such as your payment history and the amounts you owe. Hard inquiries typically account for only about 10% of your total score. As a result, even if your score does dip slightly from mortgage shopping, it is unlikely to have a major impact on your ability to secure a mortgage, especially if your credit is otherwise strong.
Best Practices for Mortgage Shopping
Given that the impact of mortgage-related credit inquiries is minimal, it’s more important to focus on other aspects of your credit and mortgage shopping process. Here are some best practices to keep in mind:
- Check Your Credit Report Early: Before you begin mortgage shopping, check your credit report from all three major bureaus. This will give you a clear understanding of your credit standing and allow you to address any inaccuracies or issues beforehand.
- Shop Within a Short Period: To minimize the impact of hard inquiries on your credit score, try to do all your mortgage shopping within a short time frame. As discussed, inquiries within the same 14 to 45-day window will count as a single inquiry.
- Maintain Good Credit Habits: Continue to pay your bills on time, keep your credit card balances low, and avoid applying for new credit while you are shopping for a mortgage. These habits will help maintain or improve your credit score during the process.
- Consider Getting Pre-Approved: Obtaining pre-approval from a lender can give you a better idea of how much you can afford and can make you a more attractive buyer to sellers. Pre-approval typically involves a hard inquiry, but if done within the shopping window, it will not significantly impact your score.
- Focus on the Best Loan Terms: Rather than worrying excessively about the small dip in your credit score from inquiries, focus on securing the best possible mortgage terms. A slightly lower interest rate or better loan conditions can save you thousands of dollars over the life of your loan.
