Will rate shopping for a mortgage hurt my credit score?
As a real estate agent, I frequently get asked by buyers if shopping for a mortgage will lower their credit score. The short answer is yes it does lower your score– but not by a lot, only 5 to 10 points total. Follow this link to see all of the different ranking factors that make up your credit score. Credit Inquiries factor in for only 10% of your total credit score, so payment history, debt levels, and credit history have a much more significant impact on your overall score. It is important to note that no one except FICO knows the exact algorithm for determining credit scores. Lenders I talk to say that for the first 3 Hard inquiries the credit bureaus are more lenient so you shouldn’t see a drastic change in credit score for the first 3 pulls.
The only time the small ding from credit inquiries will matter is if you are close to a cutoff for a slightly better interest rate. I think a lot of buyers over worry about too many hard inquiries affecting their score- we are talking at most 1/8 of a point difference in interest rate max- but if you are a first-time buyer stretching to get into your first home, I get it, getting the most out of your money and every dollar matters. Lenders will quote your interest rates based on your credit score, as well as other factors. I often get asked by buyers that they see a lower interest rate quoted online then the mortgage interest rate they were quoted by a lender. The reason is that the advertised internet interest rates are teaser rates- they advertise THE LOWEST possible interest rate to get people to click. Once you have a full quote run by the lender, unless you are an A++ borrower the rates will be higher than advertised, by as much as one whole point! In my experience, most lenders will be pretty close with Direct Lenders offering the slightly better rates but having stricter qualifying requirements (Better for W2 employees), and mortgage brokers having slightly higher interest rates but more flexible programs guidelines (Better for independent contractors, 1099 employees, and business owners).
Two Types of Credit Inquiries
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There are two types of credit inquiries- Hard Inquiries and Soft Inquiries. When Lenders check your credit score it is always a hard inquiry (also called a “Hard Pull”) and will affect your score. When you check your credit yourself, either with credit karma or from your online bank account, that is a soft inquiry and has no effect on your credit score.
Unfortunately, in order for a lender to give you an accurate quote, they a required to do a hard pull of your credit. I recommend checking your credit score first before you start shopping for a mortgage so you know what your credit score is (When you check your own credit that is a soft pull and doesn’t affect your score). You can get a ballpark estimate from a lender by showing them the credit report you pulled before committing to having them do a hard pull. The lender requires your written permission to do a Hard Pull, so don’t worry if just talking to them will cause a Hard Pull.
I always advise clients to shop around when getting a mortgage because there are literally hundreds of mortgage programs out there and they vary greatly from program to program. I recommend getting at least 3 quotes. Remember when shopping for a mortgage to compare BOTH interest rates and mortgage fees for a true apple to apple comparison.
Obviously, you don’t want to cost yourself more money by overshopping and damaging your score. So don’t go overboard shopping.
Why do Credit Checks hurt my Credit Score?
Credit Bureaus understand that when financing a large purchase like a home, or a car, a student loan, or even applying for apartments- you may need to have more than one credit check. Creditors view borrowers getting their credit checked as an indication they are likely to borrow money in the near future. Borrowing money is not necessarily a bad thing on its own, it is how lenders make a living, especially if the borrow is creditworthy, but too many credit checks may indicate that the borrow is in financial difficulty and that they may not have enough money to pay their bills and could be a potential credit risk. Keep in mind when you borrow money your monthly payments go up.
How long does a hard Inquiry stay on my Credit Report?
The general consensus is about 2 years, however again, nobody knows for sure. I’d expect it to affect your score for a least 1 year but not much more than that- this isn’t the most important factor. If you have 6 or 8 hard pulls all in one kind of credit (like credit cards) in the last year that will obviously have a larger effect on your score than 1-3 pulls for different kinds of credit.
If my Score lowers 5 to 10 Points, How much will that affect the interest rate?
For mortgages, the minimum threshold used to be 680 but it has loosened up recently to 620. Once you get above 740 there is no impact from having a higher credit score on the interest rate. So remember how I said it is a good idea to check your credit score first? Let’s say you have 800- then it won’t really matter what you do, as 5-10 points will have little to no affect on your loan terms. Let’s take a different scenario, let’s say you were at 621. This would be a huge deal, as a 5 point drop could disqualify you from a mortgage altogether and you would need to be so so careful. There is about a 1% interest rate spread between A rating and C rating and each tier is more or less 1/8% percentage point difference. The example thresholds below where provided by Michael Abrams of RPM mortgage. Loan program interest rate thresholds will vary from loan program to loan program but this is a pretty representative example.
Conventional Financing Thresholds:
740 and above A+ Rating
720-739 A rating
700-719 A- rating
680-699 B+ rating
660-679 B rating
640-659 C+ rating
620-639 C- rating
A Lower Loan to Value ratio (LTV) can also lower interest rates. Let’s suppose you are 20% down with 640 credit score if you put down 30% or 40% that may drop the interest rate a few eights of a point because of the lower LTV ratio, so credit score is important but it is just one of the factors lenders considering when quoting an interest rate.
James Mortgage Shopping Tips
#1 – Shop Quickly, there is some debate on how long banks will consider multiple credits pulls as part of the same shopping event, but in general it is 14 days to 45 days with the consensus being 30 days. Make sure if you are getting multiple quotes to do it in a 30-day time frame to minimize credit score damage from hard pulls.
#2- Pull your credit yourself and send your report to lenders to give you a ballpark estimate over the phone before having a hard inquiry
#3- Get more than 1 quote
#4- Don’t excessive shop 4 quotes max
#5- Compare not only interest rates but also Loan Fees
#6- Organize and Save all of your mortgage application documents in one place so that applying more than once is easier and quicker
#7- Get a quote from your current bank, and ask friends family and real estate agents for referrals