Does Applying for a Mortgage Loan Affect Your Credit Score?

A mortgage application can impact your credit score, though the effect is often minor and temporary. Understanding how mortgage inquiries function, their impact on your score, and broader credit score influences can help you navigate the process.

Understanding Credit Inquiries

When you apply for credit, lenders typically request information from your credit report, resulting in a credit inquiry. There are two types: soft inquiries and hard inquiries. A soft inquiry occurs when you check your own credit score or when a lender pre-screens you for an offer. These inquiries do not affect your credit score and are often invisible to other lenders.

A hard inquiry occurs when a lender formally checks your credit report after you apply for a new loan or line of credit, such as a mortgage, auto loan, or credit card. Lenders perform hard inquiries to assess your creditworthiness. The presence of hard inquiries on your credit report signals to other lenders that you are actively seeking new credit.

Impact of Mortgage Inquiries on Your Score

A mortgage application initiates a hard inquiry on your credit report. A single hard inquiry typically causes a small, temporary dip in your credit score, often by fewer than five points. The exact impact can vary depending on your overall credit history and the scoring model used. For individuals with an extensive and positive credit history, the score drop may be even less noticeable.

Multiple inquiries for the same type of loan, such as a mortgage, within a specific timeframe are usually treated as a single inquiry by credit scoring models. This concept, known as “rate shopping,” allows consumers to compare loan offers from various lenders without incurring multiple penalties. For FICO scores, this shopping period typically ranges from 14 to 45 days, depending on the scoring model version. VantageScore models generally count inquiries within a 14-day period as one.

A hard inquiry generally remains on your credit report for up to two years. However, its impact on your credit score typically diminishes much sooner, often within a few months. FICO scores may only consider inquiries from the most recent 12 months. The overall effect of inquiries on your credit score is usually minor when compared to other factors.

Factors Influencing Your Credit Score

Credit scores, calculated by models like FICO and VantageScore, consider various aspects of your financial behavior. The most significant factor is your payment history, which accounts for approximately 35% to 41% of your FICO or VantageScore, respectively. This assesses whether you consistently pay your bills on time.

The amounts you owe, particularly your credit utilization ratio, also heavily influence your score, typically making up around 30% of a FICO score and 20% to 34% of a VantageScore. This ratio compares your outstanding debt to your available credit. A longer credit history generally benefits your score, contributing about 15% to FICO scores and 20% to 21% to VantageScores. The mix of different credit types and new credit applications, including inquiries, each account for a smaller portion of your score.

Preparing Your Credit Profile for a Mortgage Application

Before applying for a mortgage, optimize your credit profile. Obtain copies of your credit reports from Equifax, Experian, and TransUnion, and review them for accuracy. If you identify any errors, dispute them promptly to ensure your credit information is correct.

Reducing existing debt, especially on revolving credit accounts like credit cards, can lower your credit utilization ratio. Maintaining a consistent record of on-time payments for all your accounts is also important, as payment history is a primary determinant of your score.

During the months leading up to and throughout the mortgage application process, avoid opening new credit accounts or closing old ones. Opening new accounts can trigger additional hard inquiries. Closing old accounts might reduce your overall available credit, potentially increasing your credit utilization ratio. Focusing on responsible credit management strengthens your financial standing for a mortgage application.