Busting the Credit Inquiry MYTH!
You know that credit inquiries can lower your credit score and that multiple inquiries can put you at risk of having a lower score and a higher interest rate. When shopping for a home mortgage, however, that risk seems to be even greater, as each lender wants to run their credit check before issuing you an offer. Still, do all those inquiries have the negative impact that you think they do? Let’s bust that myth right now!
What is a Credit Inquiry?
A credit inquiry is a formal request to review a person’s credit report. Those inquiries are just one small element within a larger credit scoring category, which is known as “New Credit” and makes up approximately 10% of your overall credit score.
Getting new credit is relevant to your credit score because you are essentially asking to increase your level of indebtedness. Credit scores drop because each new credit inquiry increases the probability that you might not be able to make good on your payments to your creditors.
Types of Credit Inquiries
When it comes to credit inquiries, however, not all are created equal. Here are examples of different types of credit inquiries.
Mortgage loanAuto loanCredit card applicationStore credit cardConsumer loan
Each of these credit inquiries receives different treatment by the credit bureaus. For instance, a credit card application carries more weight on your credit score than a mortgage loan, which means that if you have enough of them in a short period, they can cripple your credit score. Why is this the case?
Credit card debt tends to increase over time, whereas mortgage debt eventually pays down to $0. Hence, the credit card debt can weaken your overall credit position.
Impact of a Mortgage Credit Inquiries
By now, you might be breathing a bit easier, knowing that credit inquiries for a mortgage do not carry the same weight as a credit card inquiry. Therefore, if you are shopping for a new mortgage, recognize that several credit inquiries from different lenders are unlikely to dramatically impact your score before you choose the loan that is right for you.
In fact, a typical mortgage credit inquiry often only lowers your score by a few points. Here is why. Mortgage lenders evaluate credit using the FICO scoring model, which ranks scores from 300-850. Thus, 65% of that score is linked to two key elements of your credit history, namely your payment history and how you have used credit in the past or your credit utilization.
The next 15% of your credit score is tied to your credit history, which is the length of time you have had credit in your name.
The next 10% of your credit score is linked to the type of credit that you have. Auto loans and mortgage debt are both viewed as positives in this regard, whereas store credit cards are viewed as a negative. Determining what makes one type of credit a positive and another a negative is based on default rate data accumulated from tens of millions of other borrowers.
Shop Multiple Lenders and Get One “Ding”
Although mortgage credit inquiries only cost you a few points on your score, there is a method to get only one “ding” while shopping multiple lenders.
The credit bureaus have created a formal policy to permit “rate shopping” for mortgages. As a borrower, you have the right to shop with as many lenders as you like to find the right loan for your needs and budget. The secret is to do all your shopping within a limited 14- to 45-day time frame. Typically, doing it this way means that the credit bureaus will ding you for the first inquiry, but ignore the next few within that window, meaning all those inquiries are seen as just one “ding.”
Therefore, you can feel confident that your mortgage credit inquiries are unlikely to dramatically impact your score or your ability to find the right mortgage for you. If you are looking for a home mortgage, contact us to find out what options are available before you start the lending application process.
We at 7th Level Mortgage are an experienced team of mortgage professionals based out of New Jersey and serving the east coast from Pennsylvania to Florida including Delaware and Maryland. We have won numerous awards for our excellent professional work and reputation with clients for being extremely diligent, accessible and hands-on throughout the entire mortgage process.