Why You Shouldn’t Worry About Multiple Credit Inquiries When Shopping for a Mortgage
When it comes to buying a home and obtaining a mortgage, whether you're a first-time homebuyer or buying an investment property, the concern about how multiple credit inquiries affect your credit score is common. After all, your credit score plays a crucial role in determining the interest rate on your mortgage, potentially saving you thousands of dollars over the loan's lifespan.
The good news is that multiple credit inquiries from different lenders are typically treated as a single inquiry, as long as they occur within a specific timeframe, typically between 14 to 45 days. So, if you're worried about the impact of rate shopping on your credit score, here's what you need to know about multiple credit inquiries when seeking a mortgage.
Contact a Chicago Real Estate Agent
3 Key Points of Credit Reports and Applying for a Mortgage
1. Shop with Confidence: You have the freedom to explore mortgage options with as many lenders as you prefer, and it's often advisable to consider at least three lenders for comparison.
2. Minimal Impact: The great news is that applying with multiple mortgage lenders should not negatively affect your credit score significantly.
3. Time Window Matters: To ensure that multiple credit inquiries are treated as a single inquiry, it's essential to gather all your mortgage quotes within the 14- to 45-day window.
Understanding the Credit Checks
Mortgage lenders typically check your credit history multiple times during the application process, but these checks serve different purposes:
1. Initial Credit Check for Pre Approval: When you're ready to make offers on potential real estate, you'll often seek preapproval for a home loan. This process involves verifying various aspects, including your income, employment, account balances, and more. It also includes an initial credit check, which is the first of potentially three hard credit inquiries during your loan application.
2. Credit Check During the Mortgage Application Process: Sometimes, a second credit inquiry may occur during the application process, particularly if there's a significant gap between preapproval and closing. Credit reports are typically valid for 120 days, so lenders may need to re-pull your credit. This can be beneficial if you've improved your credit score during this time.
3. Final Credit Check Before Closing: Prior to closing on your home loan, lenders conduct a final credit check to ensure there are no new credit inquiries or debts that could impact your loan terms. This final check is a soft pull and doesn't affect your credit score.
Impact on Your Credit Score:
While multiple credit inquiries can potentially impact your credit score, for most people, the effect is minimal, typically reducing the score by less than 5 points. The impact can vary based on the type of creditor, the type of loan, and your current credit profile.
Types of Credit Inquiries:
Hard Inquiries
These occur when financial institutions check your credit for lending decisions, such as applying for a mortgage, auto loan, personal loan, student loan, or credit card. Hard inquiries can affect your credit score (FICO says hard inquiries typically affect your score less than 5 points). Hard inquiries can stay on your credit report for a maximum of two years, but if you consistently make your debt payments on time, your credit score typically recovers from an inquiry in just a few months. Additionally, many credit scoring models no longer factor in a hard inquiry when calculating your score after 12 months.
Soft Inquiries
Soft Credit inquiries (Also Called “soft-pull”) are background checks that do not negatively affect your credit score. They are used for various purposes, such as employment verification. Here are some examples of “soft-pull” credit inquiries:
Checking Your Own Credit: When you request a copy of your own credit report or check your credit score, it is considered a soft pull. This is also known as a "soft inquiry" and does not harm your credit score.
Employment Background Checks: Some employers may conduct soft credit checks as part of their hiring process to assess a candidate's financial responsibility. This is more common for positions that involve handling money or sensitive financial information.
Pre-Approval for Credit Offers: When you receive pre-approved credit card or loan offers in the mail, the issuer has likely done a soft pull of your credit to determine if you meet their initial criteria.
Credit Monitoring Services: Credit monitoring services that track changes to your credit report may use soft pulls to provide you with updates and alerts about your credit activity.
Insurance Quotes: When you request insurance quotes, such as auto or home insurance, insurance companies may perform soft credit checks to assess risk factors and determine your premium rates.
Timing and Credit Scoring Models
The impact of multiple credit inquiries depends on the credit scoring model used. FICO and VantageScore are the main models, with different versions offering varying timeframes for rate shopping. It's essential to discuss this with your lender.
Pull Your Own Credit Report: Free Annual Credit Report
Before letting lenders pull your credit, consider obtaining your credit reports for personal review. You can access free annual reports from TransUnion, Experian, and Equifax. This allows you to identify inaccuracies and ensure you're in the best position to secure favorable mortgage rates and terms.
In conclusion, don't let the fear of multiple credit inquiries deter you from shopping for the best mortgage rates. Understanding the timing, types of inquiries, and credit scoring models will help you make informed decisions while safeguarding your credit score.
