There’s a misconception that applying for a mortgage causes your credit score to drop each time, but that’s not actually the case. The sole act of having your credit report pulled when submitting a loan application does not instantly cause a reduction in your credit score, but it will impact you eventually. Here’s the deal …
When you apply for a mortgage loan, you authorize a mortgage company to obtain the most accurate comprehensive detailed financial credit report available. More than any one-score credit report, auto loan credit score or a personal crediting reporting service score, a financial services provider credit report is king in the lending world. It includes three different credit scores — one from each major credit reporting agency, and the lender will use the middle of the three scores for determining your loan eligibility.
The federal government encourages borrowers to be savvy by shopping for mortgages to compare rates and fees. A lender’s rates and fees only hold water with a credit report in hand from that individual mortgage provider, coupled with the consumer’s financial documentation. This is why your credit score is not penalized immediately when you apply for a home loan, with one caveat – that you complete your comparative price shopping generally within 30 days. The multiple inquiries from those 30 days are grouped and considered one inquiry that impacts your score once the 30 days are up.
Mortgage Credit Reports & Hard Inquiries
Applying for a mortgage does show up as a credit inquiry on your credit report. Having too many total credit inquiries over time may result in a slight drop your score because it looks like you’re shopping for credit, demonstrating a possible inability to manage your liabilities. However, it does depend on the type of credit you’re shopping for – typically a credit score looks differently at loans for which you need to comparison shop, like mortgages, student loans and auto loans. If you have multiple inquiries for one type of loan within a 30-day period (or so), the credit score will generally count them as one inquiry.
Let’s look at what may hurt your score, though — for example, a credit pull such as a mortgage inquiry, followed by a car loan inquiry, followed by a credit card inquiry or two, or any other forms of credit in addition to applying for a mortgage. If you are not shopping or looking for any other form of credit other than a mortgage, though, your credit score shouldn’t be lower due to an inquiry when you get a quote from Mortgage Company B after getting a quote from Mortgage Company A a week ago.
Why Scores May Be Different Among Mortgage Companies
Let’s say you’re applying for a mortgage with a direct lender and your middle credit score is 740. Being a smart customer, you decide to do your due diligence by also comparing another mortgage company and your credit score is now 739. The one-point drop in score should not be immediately attributed solely to result of pulling credit, but rather the credit picture as a whole.
It all boils down to when all of your accounts are reporting to the credit bureaus with current activity. If you have several credit cards, for example, and each one of these accounts report to the credit bureaus at different times of the month based on your spending, payment and balance activity, that could change the scores generated between the mortgage companies you’re considering using for your mortgage loan.
Credit Reports Are Not Universal
Each credit report is only for use with that lender to whom you applied. Mortgage tri-merge credit reports are not transferable among lenders — nor is it reasonable to assume that your credit scores from each bureau are going to be exactly the same with a different lender. Each time you apply for a mortgage or want actionable rates and fees, you have to agree to let the mortgage company pull your credit report. Pulling credit and generating a score is only to procure mortgage-pricing accuracy. Moreover, if there’s anything related to your credit history that could be problematic, this can be taken care of upfront to prevent a surprise from popping into the process later on that could threaten the deal and/or financing terms.
Items That Can Hurt Your Credit the Most When Getting a Mortgage
If your score changes after applying for a mortgage, the culprit for any credit changes can more than likely be tied to one or more of the following items:
- Late payments on any of the following: Any loans or credit cards in the past 36 months (the more recent, the bigger the effect on the score).
- High utilization of credit: The available credit lines you do have (i.e. credit cards) are above 25% of your credit limit. Keep you spending under 10% ideally.
- Age of credit: If you’re doing it right, keep at it and over time your credit will rise, and the age of paid-as-agreed credit bolsters your scores — all of them.
Before you get ready to shop for a mortgage – and a home to buy – it’s important to start checking your credit several months ahead of time. You can pull your free annual credit reports to look for inaccuracies or other problems you need to address, and you can see two of your credit scores for free, updated monthly on Credit.com. Your credit will have an impact on your interest rates, which can affect how much house you can afford. Knowing where you stand ahead of time can help you better plan a course of action.
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Scott Sheldon is a senior loan officer and consumer advocate based in Santa Rosa, Cali. His work has appeared in Yahoo! Homes, CNN Money, MarketWatch and The Wall Street Journal. Connect with him at Sonoma County Mortgages. More by Scott Sheldon