How to Maintain Your Credit Score While Shopping for Mortgage Rates

Most homebuyers know that shopping around for mortgages is essential to find a competitive mortgage rate. They also know that the higher their credit score, the better the mortgage rate they can receive.

Unfortunately, when a buyer applies for multiple home loans, they could be negatively affecting their credit score: A lender will review your credit history with a credit inquiry every time you apply for a home loan, which tells the credit reporting agencies that you may be taking on new debt and potentially lowers your credit score.

The result is a catch-22: Shopping around for mortgages can help you find the best mortgage rate, but it could also lower your credit score, jeopardizing your ability to get a good rate.

The good news is that with the following tips, it is possible to mortgage shop without hurting your credit score.

Shop Within a 45-Day Window

You have 45 days to shop for mortgages without damaging your credit when lenders use the newer FICO scoring model. Any credit checks from lenders within this time frame will appear as a single inquiry on your credit report, so making more inquiries doesn’t impact your credit more. 

When lenders use older versions of the FICO scoring model, the time frame for multiple inquiries to count as one reduces to just 14 days

Every lender gets to choose which version of the FICO scoring model they want to use, so your shopping window could vary from one inquiry to the next. Homebuyers who want to be as cautious as possible should do their best to keep all mortgage shopping within two weeks, just to be safe.

Extending Past the 45-Day Window

Don’t worry too much if your mortgage shopping extends past the 14- or 45-day window: Inquiries only make up 10% of your FICO score weighting.

How much each inquiry affects your credit depends on your borrowing history. Buyers who have an extensive borrowing history with a strong payment record and without many inquiries in the recent past won’t see much damage — perhaps a drop of five points.

Newer borrowers will likely take a greater hit, but the impact is usually still minor.

In most cases, the money you’ll save by finding a lower mortgage rate makes the temporary drop in your credit score worth it. 

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Check Your Credit Report Yourself

Check your credit report yourself before applying for a mortgage to look for any errors that might be negatively affecting your credit score. Be sure to get them corrected so that they don’t keep you from getting the best interest rate possible.

Checking your own credit report doesn’t impact your credit score at all because credit reporting agencies handle these inquiries differently. Federal law dictates that everyone is allowed one free annual credit report, which you can get at AnnualCreditReport.com.

[Related: Think You Know How to Find Your Credit Score? Think Again]

Prequalify for Mortgages

Mortgage prequalification, sometimes referred to as a rate check, is a great way to get an idea of how large of a loan you will qualify for. When you prequalify for a mortgage, the lender reviews your basic information and checks your credit to estimate how much you could receive if you applied for a loan.

Prequalifying doesn’t hurt your credit score because it involves a soft inquiry rather than a hard inquiry:

  • Soft inquiry: A soft inquiry (or soft pull) is a less rigorous inquiry that lenders use to prescreen a buyer’s credit file. Soft inquiries will not impact your credit score.
  • Hard inquiry: Lenders typically complete hard inquiries (or hard pulls) after buyers have applied for credit. Hard inquiries negatively influence your credit score.

You can use your mortgage prequalification as a guide as you continue shopping around. If you can only prequalify for a loan of $400,000, you’ll know not to apply for mortgages of $800,000. This way, you’ll avoid making inquiries that won’t go anywhere.

[Related: The Difference Between Pre-Approval and Full Credit Approval]

Minimize Your Other Borrowing

Mortgage shopping won’t negatively influence your credit score too much if you do it right, but other behaviors could. 

One of the worst things you can do while mortgage shopping is applying for a new line of credit. The hard inquiry associated with this application will cause a drop in your credit score and could affect your ability to get a home loan.

Remember that the higher your credit score, the better the mortgage rate you’ll receive, so you should do everything you can to improve your score — or at least keep it where it is.

[Related: How to Get Your Mortgage Approved (and Keep It That Way)]

Work With a Mortgage Broker You Trust

If you’re not sure if you’re doing everything you can to maintain your credit score while mortgage shopping, ask your mortgage broker. Seattle Mortgage Planners is happy to work with you during the mortgage shopping process to help you get the best mortgage rate possible.

Schedule a consultation with us today to get started!

Featured image via Unsplash

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