How To Shop For A Mortgage Without Hurting Your Credit: Tips For Success
When you go through the home-shopping process, it goes without saying that you want to learn how to shop for a mortgage without hurting your credit. After all, you might worry about your ability to get the mortgage in the first place if you damage your credit.
Let's walk through a quick overview of how shopping for a mortgage interacts with your credit, an overview of credit scores, and how to avoid hurting your credit when shopping for a mortgage.
Does Shopping Around For A Mortgage Hurt Your Credit?
You might have already asked, "Will shopping for a mortgage hurt my credit?" prior to stumbling on this article. If so, good for you! You know you need to protect your credit at all costs.
You can rest easy knowing that you can shop around for a mortgage without hurting your credit. In fact, you can consult as many lenders as you want as long as your last credit check occurs within 45 days of the first credit check. Optimal shopping period time frames are built around FICO® scoring models. FICO® gives you a 45-day grace period for mortgages when they go into one inquiry. In other words, FICO® treats similar loan-related inquiries within 45 days of each other as a single inquiry.
For example, let's say you shopped for a mortgage with five different lenders over a period of 45 days. FICO® would consider those five hard inquiries as one hard inquiry. A hard inquiry could lower your credit score by a few points. On the other hand, soft credit inquiries won't affect your score.
You might wonder what would happen to your credit score if you shopped beyond the 45-day time frame. After 45 days, new mortgage quotes will add a soft inquiry to your credit report. Try to avoid adding these inquiries to your credit report and do your shopping within the 45-day window.
How Credit Scores Work: A Closer Look
Let's take a look at the credit bureaus, credit scores and do a deeper dive into how they work.
First, the credit bureaus, EquifaxTM, Experian® and TransUnion®, get information about your credit activity and payment history from creditors, such as your credit union or bank, credit card issuer or landlord. Lenders use FICO® scores (based on the data in your credit reports) to determine whether borrowers can qualify for mortgages.
The three credit bureaus update your credit report once every 30 – 45 days. Your credit score remains an important part of the mortgage process because it helps your lender understand how well you may repay your loan. Lenders typically look for a credit score of at least 620, though it depends on other factors, such as your debt-to-income ratio, cash for a down payment and more. If you have a lower credit score, you may receive a higher interest rate or get denied for a mortgage loan altogether.
Several factors that go into your credit could hurt your credit score, including not paying bills on time, delinquent child support, not paying rent and closing a credit card, to name a few.
Should You Monitor Your Credit While Mortgage Shopping?
You want to know your credit score in advance of shopping around for a mortgage, particularly because you could encounter reporting errors or inaccurate negative information on your credit reports.
Besides reporting errors, several other things could impact your credit score and your mortgage options, including duplicate accounts, incorrect name spellings, fraudulent accounts (if you're the victim of identity theft), incorrect payment statuses and more.
What happens when you or an organization checks your credit? An inquiry gets noted on your credit report. Soft inquiries, such as when you check your own credit score don't affect your credit scores. However, hard inquiries from a lender trying to make a decision about whether or not to lend to you can affect your score.
You want to check your credit periodically, so you know how creditors are evaluating you. Learn more about checking your credit through Mortgage Missteps: Not Checking Your Credit Score.
How To Avoid Hurting Your Credit When Mortgage Shopping
Below, we'll offer tips for how you can go rate shopping for a mortgage without hurting your credit.
Shop Within A Short Time Frame
Again, multiple credit checks from mortgage lenders go on your credit report as a single inquiry as long as you stay within that 45-day window.
Within this time frame, you can look around and even get multiple preapprovals from many different lenders. Shopping around gives you the biggest advantage because you can compare and contrast interest rates, loan terms and plan how to save money over time.
What happens if just one lender must check your credit after the 45-day window? You'll find that the impact of an additional inquiry will stay small.
Look Into Preapproval
Preapproval saves you a lot of time because it helps you eliminate properties outside of your price range. You may have heard two terms used interchangeably: “prequalified” and “preapproved.” What's the difference between the two?
To describe both: Lenders review your financials and estimate how much home you can afford. However, as you might imagine, differences exist between both preapproval and prequalification.
Prequalification gives you an idea of what you might qualify for, but preapproval requires you to offer a lender more information. A lender may ask for your W-2s, pay stubs and tax returns before they give you an estimate.
Furthermore, lenders often have different definitions of preapproval and prequalification, so make sure you understand whether an estimate will more likely get you closer to getting the home you want.
Refrain From Applying For New Credit
You want to try not to apply for new credit while you shop around for a mortgage. New credit only makes up around 10% of your scores, but if you want the best rates possible, you'll put yourself at the best advantage if you don't open up a lot of new credit while you look for a new home.
For example, a new credit card application will trigger a hard inquiry, reducing your credit score a few points.
This might not seem like a big deal, but what if your scores hover close to the 620 range? It could affect your lender's decision to grant you a mortgage. Furthermore, inquiries stay on your credit reports for 2 years. However, FICO® only considers credit history and inquiries from the past 12 months. Based on this information, you may want to avoid getting new credit a full year prior to shopping around for a mortgage.
The age of your accounts also gets taken into consideration. In other words, you'd rather have had a credit card for 5 years versus 5 weeks as you shop around for your mortgage.
Check Your Credit Score At The Right Time
You may already know that you should monitor your credit score in general. However, you might want to make a specific point to do so prior to applying for a mortgage or as soon as you think you might want to buy a home.
While you know that you should only apply for and open new credit accounts as needed, know that viewing your own credit information will not affect your FICO® scores. In fact, doing so removes all traces of doubt that your personal and account information remains correct. You may also find that you head off potential cases of identity theft.
Check your credit score just prior to launching the mortgage shopping process so you know the ins and outs of your credit score and can get any errors corrected quickly.
Control Your Loan Types
We covered the fact that you don't want to take out loans or apply for other credit prior to getting a mortgage. However, you may also not want to get credit or loans at the same time you shop for a mortgage.
These types of hard credit inquiries show up on your credit report as separate inquiries even during the 45-day period.
The Bottom Line
So, does shopping around for mortgage hurt credit?
Ultimately, you can shop for a mortgage without hurting your credit. In fact, you can consult as many lenders as you want as long as your last credit check occurs within 45 days of the first credit check. It will show up as one hard inquiry. When you check your own credit, that looks like a soft inquiry on your credit report.
The credit bureaus get information about your credit activity and payment history from creditors. Lenders then use FICO® scores to determine whether you can qualify for mortgages and under specific interest rates, loan terms and more.
All of this remains an important part of the mortgage process because it helps your lender understand your reliability as a borrower.
A few tips that can help you shop for a mortgage without hurting your credit: shop within a short time frame, look into preapproval, refrain from applying for new credit, check your credit score at the right time and control your loan application types.
Ready to roll now that you know you can still go shopping for mortgage rates and not hurt your credit score? Read more about what credit score you need to buy a house before you get started.