Shopping for a home loan means getting your credit pulled. There's no way around it.
Without taking a look at your credit report, most lenders won't be able to complete your pre-qualification, much less pre-approve you to purchase a home.
Granting lenders permission to pull your scores -- yes, they need your permission -- constitutes what's known as a "hard inquiry." To be sure, a hard inquiry can ding your credit.
But if there is a hit, it's typically just a handful of points. Hard inquiries on your credit can be a troublesome sign. But the major credit bureaus also see the value of comparison shopping -- and that's why they cut home buyers some slack.
Let's take a closer look at how shopping around for a mortgage will affect your credit and the smartest ways to limit the impact.
Hard vs. soft inquiries
Your credit report isn't just a measure of your financial health. It's also a powerful identity verification tool, which is in part why employers and insurance providers might also want a peek.
For consumers, that means the reason behind the inquiry plays a role. There are always exceptions, but the big difference between hard and soft inquiries generally lies in their potential to result in new debt obligations.
Hard inquiries can include:
- Mortgage applications
- Auto financing
- Credit cards
- Retail credit accounts
Soft inquiries can include:
- Checking your own credit. You can get your free annual credit reports from AnnualCreditReport.com without dinging your credit, for example. And you can check your credit scores for free on Credit.com without a hard inquiry as well.
- Services that check and monitor your credit (Be careful: Paid credit repair services generally don't fall under this category and can be detrimental to your credit scores.)
- Insurance providers
Other types of inquiries toe the line between the two. To be safe, you should ask about what type of credit inquiry will be made if you're thinking about:
- Signing a mobile phone contract
- Setting up cable, Internet, or utility service
- Opening a bank account
- Increasing an existing line of credit
Creditors want to look at your hard inquiries, and for good reason: Every new debt takes a bite out of your monthly budget. If it looks like you're making sudden, desperate attempts to borrow money, this can raise a red flag for creditors who may be worried about your ability to repay the credit they extend to you.
But don't panic: Seeking loan pre-approval from multiple mortgage lenders isn't going to kill your scores.
How mortgage pre-approval & hard inquiries work
Normally, a hard inquiry is a hard inquiry. Where things can change is if you're rate shopping among multiple mortgage lenders.
First, it's important to understand that pre-approval isn't a binding step. You can work toward a pre-approval letter from as many lenders as you like.
Second, the credit bureaus have come to expect rate shopping. Rather than count every mortgage credit pull against you, most scoring formulas treat all of these hard inquiries within a certain time period as one, big credit pull.
The time frame varies depending on the scoring firm. For example, the newest FICO scoring models consider all inquiries within a 45-day window as a single hard credit pull. The older versions of the FICO scores work off a 14-day span, so ask the lender what scoring model it'll be using.
That gives consumers a solid period of time to work toward pre-approval among multiple lenders. You'll get a good look at their rates, terms, and estimated closing costs without worrying about your credit score taking a nosedive.
Also, FICO scores will ignore any hard mortgage inquiries in the 30 days preceding your scoring, so if you go to a second lender a week after getting pre-approved by the first, your hard inquiry from the first lender won't be factored into your scores already.
Don't let the fear of losing a couple of points from an inquiry keep you from starting the mortgage-shopping process. You can always have a chat with a mortgage lender about affordability and loan terms without having a hard inquiry, especially if you've checked your credit scores recently and know where you stand. Just keep in mind that different lenders use different credit scoring models to get you approved, so their estimates will be just that -- estimates -- until you ask for a hard inquiry to be done. The key to minimizing the impact of hard credit inquiries is to understand what they are and how they can affect you. Information is your best protection.
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