Does Shopping for a Mortgage Hurt Credit?

Shopping for a mortgage often raises questions about its impact on credit scores. Many consumers are concerned that multiple lenders checking their credit during the home-buying process could negatively affect their financial standing. While credit inquiries can influence your score, specific rules exist for mortgage shopping that mitigate this effect. These rules allow consumers to compare loan offers without undue credit score penalties.

Types of Credit Inquiries

Credit inquiries are categorized into two main types: soft inquiries and hard inquiries. A soft inquiry occurs when an individual checks their own credit report or when a lender pre-screens them for an offer. These inquiries are not tied to a specific credit application and do not affect one’s credit score. Examples include checking your credit score through a credit monitoring service or receiving a pre-approved credit card offer in the mail.

In contrast, a hard inquiry, sometimes called a hard pull, happens when a lender formally requests to review your credit report as part of a credit application. This occurs when applying for new credit, such as a mortgage, auto loan, or credit card. Lenders conduct hard inquiries to assess a borrower’s creditworthiness and determine the risk involved in extending credit. Unlike soft inquiries, hard inquiries can influence credit scores.

Impact of Credit Inquiries on Scores

Hard inquiries can cause a slight, temporary decrease in a credit score. A single hard inquiry typically reduces a FICO Score by fewer than five points. The exact impact can vary based on an individual’s credit history, with those having fewer accounts or shorter histories potentially seeing a slightly larger change.

A hard inquiry generally remains on a credit report for up to two years. However, its effect on the credit score usually diminishes after a few months and typically only impacts the score for about 12 months. Compared to other factors like payment history or credit utilization, the influence of a single hard inquiry on a credit score is relatively minor.

Mortgage Rate Shopping and Your Credit

Credit scoring models, such as FICO and VantageScore, recognize that consumers need to shop around for the best rates for significant loans like mortgages. To accommodate this necessary comparison shopping, these models incorporate special rules. Multiple hard inquiries for the same type of loan, such as a mortgage, made within a specific timeframe are treated as a single inquiry for scoring purposes. This allows borrowers to compare offers from various lenders without their credit score being penalized multiple times.

The specific “rate shopping” window can vary depending on the credit scoring model used. Newer versions of FICO Scores provide a 45-day window during which multiple mortgage inquiries are counted as one. Some older FICO models may have a shorter 14-day window. For VantageScore models, a 14-day window is applied, treating all inquiries for the same type of loan within this period as a single event.

Strategies for Protecting Your Credit Score

When shopping for a mortgage, conduct all rate comparisons within the designated rate shopping window. This ensures multiple inquiries from different mortgage lenders are grouped and treated as a single event by credit scoring models. Borrowers should aim to complete their search for the best mortgage terms within a 14-day period to align with the shortest common window, providing a safer margin regardless of the specific scoring model a lender uses.

Maintaining a healthy credit profile throughout the mortgage application process is important. This includes paying all bills on time and keeping credit utilization low on existing credit accounts. Avoid applying for other types of new credit, such as new credit cards or car loans, during the mortgage application period. Such additional applications could result in separate hard inquiries not subject to the mortgage rate shopping rules, potentially impacting your score right before closing.