Applying for a credit card will affect a credit score. Applying for a personal loan will affect a credit score. And, most definitely, applying for a mortgage will affect a credit score. Every time an inquiry is made from a creditor to receive a copy of a consumer's credit report, it will drop her score by a few points. The more inquiries made to a credit report, the lower the score will drop. When it comes to mortgages and credit histories, however, several inquiries made within 14 days won't affect your score because credit reporting agencies understand the need to shop for the best rates.
An inquiry made to a credit report is a request by a creditor to receive a borrower's credit report and credit score. The more inquiries made to a credit report, the more high risk a borrower will appear. Buyers who consistently apply for more credit appear as though they could become overwhelmed with debt and be a higher risk for bankruptcy; whereas, buyers who only have one or two inquiries each year would be considered a much lower risk.
The good news is that inquiries made by potential employers, current employers or the consumer themselves will have absolutely no impact on a credit score.
Few savvy buyers will make a decision on a mortgage without shopping around at different lenders for the best interest rate and APR. It can pay off both in the short term and the long term to compare lenders.
Mortgage applications are treated differently on a credit report than other credit items like credit cards and personal loans. While the mortgage application inquiry will show up on each credit report that a lender receives, if they are within 14 days, they will have no impact on a credit score. This allows a consumer to shop rates without being penalised for evaluating one lender against another.
The Biggest Benefit
In addition to giving the consumer a very good idea of how one lender compares to another, it will be clear to the lender that you are shopping interest rates and even origination fees. This can often benefit the consumer in making lenders much more negotiable with items that they can control, such as origination fees and even APR. The interest in earning a borrower's business becomes a primary focus and will be a big plus when it comes to shopping rates.
What Affects a Mortgage Application?
Conversely, a buyer should know what to expect when completing a mortgage application. If a borrower has had more than six inquiries by lenders offering to extend other types of credit (the most common being credit cards, personal loans and car loans), it can cause a delay in getting approved or even a denial of a mortgage.
Buyers with unpaid bills or late payments can expect a denial or terms of a mortgage that might not be as attractive as they would be if the borrower were in a better financial position.
While it is possible for a buyer to shop banks, interest rates and APR without having a dip in their credit score, it also possible for banks to shop you for creditworthiness.
The Bottom Line
When it comes to mortgages, it's OK to rate shop as long as the shopping is done within 14 days of each mortgage application. Since most pre-approval letters are good for 90 days, that allows you to shop rates and shop properties at the same time.
When you are approved for a mortgage and after signing off on the closing documents, expect your score to decrease for awhile, as your available credit will take a dip. This is due to having a very high loan origination on your credit with a high balance. Once payments on the mortgage are made for a few months, expect the score to return to normal.
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