The Home Buyer's Korner

Information presented should be used for educational purposes only.

October 13th, 2011

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Keep Your Credit Score High When Mortgage Shopping

Credit ScoreSo, you’re shopping for a mortgage and your lender wants to pull your credit. Only, you don’t want her to pull your credit because you’re worried it will damage your FICO. Years ago, that made sense. Today, it doesn’t. It’s because having a mortgage company pull your credit is much different from having Target do it. The credit bureaus say it plainly, your credit scores won’t drop when your lender pulls your credit, if pulled in a 14 day window.

A “credit inquiry” is a formal request to review a person’s credit report. Credit inquiries are grouped with other traits into a credit-scoring category called “New Credit”. New Credit represents a tiny 10 percent a person’s complete credit score. On the scale of 300-850, therefore, credit inquiries represent just a portion of the complete category that accounts for a maximum of 85 FICO points. Mathematically, your credit score can’t drop more than that, but it still could be enough to prevent you from getting the best rate or worst yet; a denial outright.

Credit inquiries come in many flavors, but the bureaus isolate four types as being “a search for new credit”.

  1. A credit check for a mortgage loan
  2. A credit check for an auto loan
  3. A credit check for a credit card application
  4. A credit check for a store credit card, or consumer loan

These four types are singled out because, in each case, the initial credit inquiry is requested for the specific purpose of taking on more debt.  Extra debt increases the probability of credit default and credit scores drop as a result. Even then, the risk of default varies by credit type.

A credit card application can be more damaging to a credit score than a mortgage application.  This is because credit card debts tend to revolve higher over time versus a mortgage which eventually pays down to $0.

All things equal, credit card applications harm your credit score much more than an application for a home loan.

In the official FICO scoring model, Payment History and Credit Utilization account for 65% of a score combined and the amount of time during which you’ve had credit to your name accounts for 15%. 

So, talk to as many lenders as you want in a 14-day time frame; have your credit checked as often as you’d like; compare rates and fees.  All of the inquiries will be lumped into a single application.

To promote rate shopping and to lessen The Fear of Credit Inquiry, the people behind the FICO brand spell out for you the best way to get the best mortgage rates possible:

  1. If you want the best rate, you should “shop around” for it
  2. Limit rate shopping to 14-day timespan to keep your credit scores high
  3. Mortgage lenders need your FICO to give accurate rate quotes so give up your social security number

Metaphorically, not letting your lender see your FICO is like not letting your doctor check your blood pressure. You’ll get a diagnosis when the appointment is over — it just might not be the right one.

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