How to shop for a mortgage without hurting your credit score

Shop for mortgage rates without lowering your credit score

Whether you’re a first-time home buyer or a seasoned real estate investor, it’s smart to shop for your mortgage rate.

Many borrowers worry that shopping for mortgage rates will hurt their credit. But the good news is that there are ways to shop for a mortgage without hurting your FICO score.

So whether you’re looking to purchase a home or refinance one, here’s how to shop for mortgage rates without lowering your credit.

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Do mortgage quotes affect credit scores?

Yes, shopping for mortgage quotes will affect your credit score. This is because when a lender pulls your credit report, the major credit bureaus — Experian, Transunion, and Equifax — consider this action to be a hard credit check, also known as a “hard pull” or a “hard credit inquiry.”

However, as long as you request rate quotes during the same four-week period, the damage done to your credit score is minimal — about five points. All your mortgage quotes will be counted as a single hard inquiry as long as they’re within that window.

As an example, if you shopped for mortgage loan rates with four lenders during a 30-day time frame, the credit bureaus consider all of these mortgage inquiries as a single inquiry. Thus, reducing the impact multiple hard credit inquiries have on your credit.

How credit inquiries affect your credit score

A “credit inquiry” or “credit check” is a formal request to review a person’s credit report. It’s essentially a background check of a home buyer’s personal finances.

Consumers encounter two types of credit checks: hard credit checks and soft credit checks. A request for a mortgage rate quote results in a hard inquiry.

• A hard credit inquiry will generally lower your credit score. This is a formal request for your credit report with at least one of the three major credit bureaus, and you need to provide consent beforehand. Examples of hard pulls include personal loan and auto loan applications or opening a line of credit with a credit card issuer
• Soft credit inquiries do not typically lower your credit score. They’re intended to quickly verify financial information and can occur without your consent. Examples of soft inquiries include an employer performing a background check, checking your own credit report, or seeing if you’re prequalified for a credit card offer

Keep in mind that a hard inquiry means you’re searching for additional credit. Statistically, you’re more likely to have debt problems and default on financial obligations when you increase your available credit. This is especially true if you’re maxed out or carrying credit card debt and looking for more.

Understanding this, it makes sense that your credit scores drop when you go applying for new credit cards or charge cards.

Fortunately, credit bureaus have learned that mortgage shopping behavior does not carry the same risks, and they no longer treat multiple mortgage inquiries the same way.

If you allow multiple mortgage companies to check your credit report within a limited period of time, all those inquiries will be treated as a single inquiry. That time frame depends on the FICO system different lenders use, but it’s typically a 14 to 45-day window.

About your mortgage credit score

Credit pulls for loans will affect your credit score in time, but the effects of a credit pull will vary by creditor type. As compared to other credit applications, pulling your credit for a rate quote will do almost nothing to your credit score.

Here’s why.

Mortgage lenders usually rank applicants using an industry-standard credit scoring model known as the FICO score. This model assigns a numerical value to a person’s credit risk to a bank. Scores range from 350 to 850.

Mainstream mortgage programs typically have minimum FICO scores of 620 to 680. Government-backed loans are more flexible (VA, for instance, has no official minimum credit score). And non-prime lenders may let you go as low as 500 with a big down payment and a high interest rate.

Around 65% of the credit score is linked to just two components — credit utilization and payment history. That means the percent of available credit that you use (experts commonly recommend keeping that at 30% or lower), and how often you do (or don’t) pay your bills within 30 days of their due dates.

It makes sense that two-thirds of a person’s credit score is tied to these two behaviors. They’re important ones.

The rest of your score is driven by:

• The number of new accounts (this is related to inquiries, and opening a bunch of new credit cards before applying for a mortgage is a very bad idea)
• Your credit mix (certain kinds of credit, like mortgages, are seen as positive while having nothing but store credit cards and payday loans will hurt you)
• The age of your credit history (a longer track record of good debt management makes you statistically more likely to pay your debts as agreed)

As long as you keep your credit utilization below 30% and make on-time payments, you should be able to hold your score steady. Having your credit checked while mortgage shopping will make only a minimal impact — usually less than five points — and shouldn’t impact your home loan eligibility.

This is what the credit-scoring model, MyFICO, says about its algorithms and how it treats rate shopping inquiries:

“FICO® Scores are more predictive when they treat loans that commonly involve rate-shopping, such as mortgage, auto, and student loans, in a different way. For these types of loans, FICO Scores ignore inquiries made in the 30 days prior to scoring.

So, if you find a loan within 30 days, the inquiries won’t affect your scores while you’re rate shopping. In addition, FICO Scores look on your credit report for rate-shopping inquiries older than 30 days. If your FICO Scores find some, your scores will consider inquiries that fall in a typical shopping period as just one inquiry.

For FICO Scores calculated from older versions of the scoring formula, this shopping period is any 14-day window. For FICO Scores calculated from the newest versions of the scoring formula, this shopping period is any 45-day window. “

Compare quotes from multiple lenders without fear

How do you get the best mortgage rate? Get multiple quotes from competing mortgage lenders. Give them all the same information — your loan amount, down payment, loan term and type, and estimated credit score. The lenders will probably offer you a worksheet, a scenario, or a Loan Estimate (LE). These will show you the rate and terms they offer.

You can even make lenders compete for your business by showing them a better offer and asking them to match the rate or fees another lender quoted you.

The lenders will probably come up with different scores and different offers. If you find one lender’s scoring model puts you in a lower credit tier, you don’t have to accept that quote. You can have as many credit pulls as you like within 30 days, and maybe as many as 45 days.

Here’s what to do when shopping for a mortgage:

1. Shop around. Talk to at least three lenders, maybe even five or more
2. Limit your rate shopping to a 30-day timespan because that’s what the credit bureaus allow
3. Check multiple sources for quotes: retail banks, mortgage brokers, credit unions, online lenders, and whatever else you can find. You never know who may offer you the lowest rate
4. Lastly — and this is the most important point of all — make sure to share your social security number with your lenders so they can give you accurate mortgage rate quotes instead of just best guesses or “ballpark rates”

Metaphorically, not letting your lender check your credit is like not letting a doctor check your blood pressure. Sure, you can get a diagnosis when your appointment is over — it just might not be the right one.

How credit scores affect mortgage rates

Mortgage rates and credit scores are related. The higher your score, the better your rate — to a point. Fannie Mae, for instance, prices its loans in tiers between 620 to 639, 640 to 659, and so on. So a borrower with a 660 FICO might get a much better deal than one with a 659 score.

That means raising your FICO score by one single point could save you thousands. And anyone has the power to raise their scores by 1-20 points for a better deal.

Making things a little more complicated, though, is the fact that not all mortgage lenders use exactly the same version of the FICO score. So shopping aggressively may get you a better quote, and you may find a lender that uses a more generous version of the FICO score (there are about 50 different FICO scores these days).

Refinance applicants have the most to gain when shopping for a mortgage rate. They certainly shouldn’t be shy about it.

Homeowners can apply online or over the phone with multiple different lenders. Choose the best rate and fee structure until you’ve received your best deal.

Lenders love refinance applications: They close quicker and are much easier to process than most home purchase ones. Use that to your advantage.

There’s no penalty for applying for even dozens of lenders within a 30-day window. That’s plenty of time to receive multiple quotes and choose the best one.

What are today’s mortgage rates?

When you’re shopping for a mortgage loan, you should really request multiple quotes from a minimum of 3-5 lenders.

Thankfully, the credit bureaus make this less frightening by providing credit score protection to mortgage rate shoppers nationwide. You won’t affect your FICO when you’re only after lower mortgage rates.