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How Is Your Credit Affected by Mortgage Shopping?

A common misconception related to mortgage shopping is that having multiple lenders checking your credit report will negatively impact your credit score. This fear has caused many to reduce their mortgage shopping to only one or two lenders and obtain a very small range of mortgage options to choose from. It's an understandable concern and in years past it was also valid, but not so today. Most people, including the credit bureaus, encourage borrowers to diligently shop for their mortgage with a number of lenders to obtain the best rates and terms for their unique situation. The bottom line is when done properly, mortgage shopping will absolutely not drop your credit score.

Credit Inquiries

Whenever a potential creditor requests your credit report, it is called a credit inquiry. When you are seeking to obtain new lines of credit, it makes sense that it would affect your credit score for several reasons. First, any credit application is in reality a request to increase your debt. The more credit or debt opportunity a person has increases the chances that a person will eventually be unable to pay back the debt and will default on the loans. A person requesting multiple credit cards for example, has a greater opportunity to use them and increase their level of debt.

There are also different types of credit requests that are calculated differently by the credit bureaus. That is why applying for a car loan will be treated differently than applying for a mortgage. With a car, the value of the vehicle is almost certainly going to drop, while the equity in a home has the potential to increase. Auto loan applications will cause a larger dent to your score than a mortgage for good reason.

Credit Score Protection for Mortgage Shoppers

A mortgage lender that requests your credit report will drop your credit score by five points. One mortgage application and the five point drop is not likely to have any negative effect on your chances of approval and level of interest rate. So if you are responsible and visit with say 20 different lenders who all pull your report, simply looking for the best mortgage will drop your score by 100 points. That is a big deal.

The mortgage bureaus have wisely created policies that allow mortgage shoppers to look at all their options without causing undue damage to their credit rating. Understanding their policy and how to take advantage of it can mean the difference between a great mortgage and a mortgage you are just stuck with. When you are ready to mortgage shop, give yourself two weeks to apply with as many lenders as you would like to. The reason is the bureaus will reduce your score by five points for the first inquiry; however any additional inquiries for mortgage applications will not affect your score for a period of 14 days. Regardless of whether you apply with five lenders or fifty, as long as you are within that window you will only be hit for those first five points.

Knowledge is Power

There is no way around credit inquiries when applying for a mortgage. Because credit score is an important determinant that demonstrates a lender's risk, the fact is your credit will be pulled. And, furthermore, the system used to determine that score covers credit inquiries of all different types and taking a hit for line of credit requests just makes sense, whether we like it or not. The great news is that a little knowledge about the policy and the real effect mortgage shopping has on your credit score provides a great deal of freedom and comfort that helps ensure you make the right mortgage decision.