How Much Does a Mortgage Application Affect Your Credit Score?
Understand how a mortgage application impacts your credit score, from inquiries to other financial behaviors, and how to protect it.
A credit score serves as a fundamental indicator for lenders, reflecting an individual’s financial reliability. When applying for a mortgage, this three-digit number becomes a central element in the lender’s assessment of risk. Lenders rely on credit scores to determine not only whether to approve a loan but also to establish the specific terms and interest rates offered. A higher score generally signals a lower risk, potentially leading to more favorable lending conditions.
Credit Inquiries and Your Score
Applying for a mortgage involves a credit check, which typically results in a “hard inquiry” on your credit report. A hard inquiry gives lenders a detailed look into your credit history and can cause a small, temporary dip in your score, usually by a few points.
While a hard inquiry is a necessary part of the mortgage application process, credit scoring models incorporate a “rate shopping” rule to mitigate the impact of comparing offers. This rule treats multiple mortgage inquiries made within a specific timeframe as a single inquiry. Depending on the credit scoring model, this window typically ranges from 14 to 45 days, allowing consumers to shop for the best interest rates without facing multiple penalties to their score.
A hard inquiry generally remains on your credit report for up to two years. Its direct impact on your credit score is usually much shorter, typically affecting it for about one year or less. The initial small score drop tends to diminish over time, especially with continued responsible credit management.
Other Credit Score Considerations During Mortgage Application
Beyond the hard inquiry itself, several other factors can influence your credit score during the mortgage application period. Opening new credit accounts, such as new credit cards or car loans, can negatively affect your score. This is because new accounts can lower the average age of your overall credit history. Additionally, a new account adds another hard inquiry and can signal increased financial risk to lenders.
Conversely, closing existing credit accounts can also have an unintended negative impact. Closing an account reduces your total available credit. This action can then increase your credit utilization ratio, which is the amount of credit you are using compared to your total available credit, potentially lowering your score. Maintaining a low credit utilization ratio, ideally below 30% and preferably under 10%, is important for demonstrating responsible credit management to lenders.
Furthermore, missed or late payments carry significant negative consequences for your credit score. Even a single late payment reported to credit bureaus can cause a substantial drop in your score and can remain on your credit report for up to seven years. Lenders view late payments as a strong indicator of financial instability, which can jeopardize mortgage approval or result in less favorable loan terms.
Before and During Your Mortgage Application
Before initiating a mortgage application, it is advisable to obtain copies of your credit reports from each of the three major credit bureaus. You can do this annually for free through AnnualCreditReport.com. Reviewing these reports allows you to identify and dispute any inaccuracies or errors that could be negatively impacting your credit score. Promptly disputing errors with the relevant credit bureau and providing supporting documentation is a proactive step toward maintaining an accurate credit profile.
Throughout the mortgage application process, maintaining consistent financial habits is essential. Continuously paying all bills on time demonstrates a reliable payment history, which is a significant factor in credit scoring. It is also prudent to avoid opening any new lines of credit, such as credit cards, car loans, or personal loans, during this period.
Making large purchases on credit should also be avoided while your mortgage application is pending. Such purchases can significantly increase your credit utilization and potentially lead to a temporary drop in your credit score. Instead, focus on keeping existing credit card balances low and maintaining all current credit accounts in good standing.