Can shopping for a home loan lower your credit score?

Posted by  on Aug 31, 2011

I want to get the best mortgage rate and I know that means talking to several lenders and comparing mortgage quotes. However, I've been told that lenders pulling my credit report can lower my score.

Credit bureaus and inquiries

Credit bureaus have altered their algorithms to minimize the impact of inquiries generated by credit shoppers. Credit scoring models assume that inquiries pulled by lenders for "big-ticket" credit, like mortgages, auto financing and student loans, within a 15- to 45-day period (depending on the agency) are related to a single transaction. They are consolidated and treated as though only one inquiry was generated. In addition, inquiries for big ticket credit within 30 days of a the credit report's date are ignored.

How you get bitten

First, these provisions don't apply to credit card inquiries. If you don't like "what's in your wallet" and want to switch cards, the resulting inquiries could drop your score when you shop for a mortgage. The 10- or 20-point deduction didn't harm most folks in the past, but with risk-based surcharges used in mortgage pricing (government loans excepted), a 20-point drop could cost you between 0.5 and 2 percent depending on the loan-to-value and other parameters.

In addition, most mortgage lenders are now required to pull your credit at least twice--once when you apply for a new home loan or refinance mortgage, and again just before the loan closes. If more than 30 days passes between your mortgage shopping and your loan's closing, the inquiries can affect your score, and that can affect your mortgage rate.

Finally, just because scoring models are supposed to consolidate your inquiries doesn't mean it always happens. The creditor has to identify the sort of credit you applied for or the inquiry might not be consolidated.

Avoid inquiries to get the lowest mortgage rates

When shopping for a mortgage, you don't have to authorize lenders to pull your credit report. Pull it yourself at www.annualcreditreport.com and pay the low fees for your credit scores. Lenders need your scores to give meaningful mortgage rate quotes, and they need to pull their own report when you actually apply for credit. Until you have chosen a lender, however, keep your Social Security number to yourself and do not authorize any credit inquiry. You could avoid thousands of dollars in loan surcharges with a little care.


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