Does Mortgage Application Affect Credit Score?
Explore the precise ways a mortgage application impacts your credit score and how to manage your credit during the process.
Applying for a mortgage often brings questions about its effect on your credit score. A mortgage application typically results in a temporary, modest impact on your credit score. This article explains how credit scores are affected during the mortgage application process, helping you navigate this significant financial step with a clearer understanding.
The Nature of Credit Inquiries
When you apply for a mortgage, the lender performs a “hard inquiry” on your credit report. This type of inquiry occurs when a financial institution accesses your credit file to evaluate your credit risk as part of a loan application. It differs from a “soft inquiry,” such as when you check your own credit, which does not affect your score.
A single hard inquiry typically causes a small decrease in your credit score, often by fewer than five points. The precise impact can vary depending on your overall credit history and the scoring model used. Hard inquiries remain visible on your credit report for up to two years, although their effect on your credit score usually diminishes after the first 12 months. Lenders conduct these inquiries to assess your borrowing behavior and determine the likelihood of repayment.
The Impact of Multiple Mortgage Inquiries
Applying for multiple mortgages within a short timeframe, often called “rate shopping,” is a common practice that allows consumers to compare offers and secure competitive interest rates. Credit scoring models account for this behavior by treating multiple inquiries for the same type of loan, such as a mortgage, within a specific period as a single inquiry. This prevents your credit score from being penalized for seeking the best loan terms.
The timeframe for this deduplication varies depending on the credit scoring model. For instance, newer FICO scoring models typically allow a 45-day window for mortgage inquiries to be grouped as one, while some older FICO versions and VantageScore models may use a shorter 14-day period. To ensure the inquiries are treated as a single event, complete all mortgage applications within the shortest common window, typically 14 days. This approach allows you to shop around without incurring multiple negative impacts on your credit score.
Other Credit Score Considerations During the Process
Beyond the direct credit inquiry, several other aspects of your financial behavior can influence your credit score during the mortgage application process. Maintaining a low credit utilization, which refers to the amount of credit you are using compared to your total available credit, is important. High utilization can signal increased risk to lenders and negatively affect your score. Making all payments on time across all your credit accounts demonstrates responsible financial management.
It is also advisable to avoid opening any new credit accounts, such as new credit cards or car loans, while your mortgage application is pending. Each new account can trigger additional hard inquiries and potentially increase your overall debt burden, which lenders closely scrutinize. Similarly, refrain from closing existing credit accounts, especially older ones, as this can reduce your average account age and impact your credit history length. Consistent, positive credit habits during this period help ensure your credit profile remains strong for lender review.