Buying a home is one of the most significant financial decisions most people make. A crucial part of the mortgage approval process is the lender’s credit check raising concerns among homebuyers.
Will a credit inquiry negatively affect your credit score?
How much of an impact will it have, and is there a way to shop for mortgage rates without damaging your credit?
Let’s explore how mortgage credit checks work, how they influence your credit score, and provide practical tips for minimizing any negative effects as you navigate the home-buying process.
Types of Credit Checks: Hard and Soft Inquiries
Before diving into how mortgage credit checks affect your score, it’s essential to understand the difference between two types of credit inquiries: soft and hard.
Soft Credit Inquiries: A soft inquiry occurs when you or someone else (such as a potential employer) checks your credit for non-lending purposes. Examples include pre-approval offers or routine monitoring of your credit report. The good news is that soft inquiries have no impact on your credit score. They are not visible to lenders when reviewing your report for a mortgage application.
Hard Credit Inquiries: A hard inquiry, on the other hand, happens when a lender checks your credit during an application for a loan, such as a mortgage, auto loan, or credit card. Hard inquiries do affect your credit score, although the impact is usually small, typically lowering your score by a few points. Multiple hard inquiries in a short period, however, can have a more significant effect, which is why it’s important to understand how credit checks work in the mortgage process.
How Mortgage Lenders Perform Credit Checks
When applying for a mortgage, lenders will conduct a hard inquiry to assess your creditworthiness. This process occurs at various stages
Pre-Approval: During pre-approval, the lender will pull your credit report to determine your credit score, outstanding debts, and credit history. This inquiry helps them gauge whether you qualify for a loan and at what interest rate.
Final Approval: Before the final approval of your mortgage, lenders typically run another credit check to ensure there have been no significant changes to your credit profile since the pre-approval. This second inquiry can be another hard inquiry, but its impact is generally minimal if your credit remains stable.
Multiple Credit Checks: Some buyers worry that applying for a mortgage with multiple lenders will result in numerous hard inquiries, damaging their credit score. We’ll explain how credit scoring models are designed to account for this.
The 45-Day Window: Mortgage Rate Shopping Without Damaging Your Credit
Many homebuyers shop around for the best mortgage rates, comparing offers from different lenders. Fortunately, credit scoring models like FICO and VantageScore accommodate this by treating multiple inquiries for the same type of loan as a single inquiry if they occur within a certain time frame.
How the 45-Day Window Works: Credit scoring systems allow a 45-day window for rate shopping when applying for a mortgage. During this period, any credit checks from mortgage lenders are grouped and counted as one inquiry for scoring purposes. This window allows you to compare offers from various lenders without worrying about multiple hits to your credit score.
Best Practices: To take advantage of this rate shopping window, it’s essential to time your applications carefully. Limit your mortgage applications to a short period and avoid stretching the process beyond the 45 days. This will ensure that all credit checks are viewed as a single inquiry and minimize the effect on your score.
How Much Will a Mortgage Inquiry Affect Your Credit Score?
When a lender performs a hard credit inquiry, your score may decrease slightly, but the drop is generally temporary and manageable for most borrowers. Here’s what to expect:
Typical Point Reduction: A hard inquiry usually lowers your credit score by 5 to 10 points, though this can vary depending on your overall credit health. Individuals with a shorter or more limited credit history might see a larger impact, while those with well-established credit histories may experience only a minor change.
Factors That Influence the Impact: The effect of a hard inquiry depends on several factors:
Your existing credit score
The number of recent credit inquiries on your report
Your overall credit profile, including debt levels and payment history
Temporary Nature of the Impact: Hard inquiries typically remain on your credit report for two years, but their influence on your score diminishes over time. In most cases, the impact is short-lived and should not be a major concern for financially responsible buyers.
Tips to Protect Your Credit Score During the Mortgage Process
While credit checks are an unavoidable part of applying for a mortgage, there are steps you can take to safeguard your score throughout the process:
Monitor Your Credit Before Applying: Regularly check your credit report to catch and resolve any errors or discrepancies that could hurt your score. Doing this before starting the mortgage application process will ensure you’re in the best possible position to secure favorable loan terms.
Limit New Credit Applications: Avoid applying for new credit cards, auto loans, or any other form of credit before or during the mortgage process. Each hard inquiry can slightly lower your score, and lenders may view new credit applications as a sign of financial risk.
Pay Down Existing Debt: Reducing your credit card balances and paying off outstanding loans will lower your credit utilization ratio, which accounts for 30% of your credit score. A lower utilization ratio signals to lenders that you manage your credit responsibly, making you a more attractive borrower.
Bottom Line
While mortgage lender credit checks do have a small impact on your credit score, the effect is usually minimal and short-term. The 45-day window for rate shopping allows you to compare mortgage offers without taking a significant hit to your score. By monitoring your credit, minimizing new credit applications, and paying down debt, you can protect your score while securing the mortgage that fits your needs.
Ready to start the mortgage process? Shop for rates confidently and take the necessary steps to ensure your credit stays strong throughout your home-buying journey. If you have further questions or need personalized advice, feel free to reach out—we’re here to help!
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