It never hurts to ask — or does it? Here’s what you need to know about how credit checks can affect your mortgage rate.
Almost all home buyers know that higher credit scores mean lower mortgage rates, so it’s no surprise that one of the top questions home buyers ask is: will shopping for mortgage rates lower my credit scores?
The short answer is “No.” But only if you manage your mortgage shopping process correctly. Here’s how to preserve your credit score while shopping for the best rates.
Is it safe to have multiple lenders run my credit?
Three bureaus generate your credit scores: Equifax, TransUnion and Experian. Lenders report your monthly activities on student loans, credit cards, auto loans and mortgages to these bureaus, who then score you on an ongoing basis. Your credit scores change constantly each month based on factors like:
- Credit card balances relative to limits
- Number of open accounts and length of time accounts have been open
- On-time versus late payments
- Number of inquiries
When it comes to that last factor, credit card inquiries hit your score harder than car and mortgage inquiries. For example, if you’re out shopping at three department stores and allow all three stores to process new credit cards for you, the bureaus’ scoring models are coded to lower your score for each individual inquiry.
Each inquiry would lower your score by up to five points, or more if you have just a few accounts and/or a short credit history. The inquiries would stay on your credit report for 24 months, and your score wouldn’t recover for about 12 months — until you demonstrated strong payment history and balance-to-limit control on those new cards.
Car and mortgage inquiries make less of an impact because the bureaus know consumers shop for these big-ticket items. The bureaus’ scoring models are coded to “de-duplicate” multiple mortgage inquiries, since the end result of those inquiries would be one mortgage.
For example, if you were shopping for a mortgage with three lenders, and all three ran your credit one week, the three inquiries would show on your report, but would be scored as only one, so your shopping process would cause your score to shift by up to five points instead of up to 15.
How long can I shop for mortgages without damaging my credit?
Equifax, TransUnion and Experian are constantly changing scoring models. The newer the model, the longer a consumer can shop for mortgages with multiple lenders and have all inquiries scored as one. There’s no law requiring lenders to upgrade to the latest model, and it’s impossible to know which model is being used by which lender at any given time.
The oldest scoring models still being used by lenders de-duplicate multiple mortgage inquiries posted on your credit report in the past 14 days. The newest models de-duplicate multiple mortgage inquiries posted on your credit report in the past 45 days.
Obviously, the newer models allow for more shopping time, but since you won’t know which credit scoring model your various lenders are using, it’s safest to get your mortgage shopping done (including having lenders run your credit) within 14 days.
Will lenders take a credit report I ran myself?
You’re reminded constantly by the media and advertisements that you should check your credit regularly, but before you do anything, you must understand the following critical points:
- Federal law requires mortgage lenders to check your credit history and scores when approving your loan. So even if you have your own report, the lender can’t accept it. If they’re going to lend to you, they must run their own credit report on you. They will run scores from all three bureaus, and typically use the middle of the three scores to finalize your rate and make loan approval decisions. However, some lenders might provide initial rate quotes if you can provide a reliable and recent credit score estimate.
- Federal law also states consumers must be able to obtain a free credit report every 12 months. The only government-sanctioned place to do this is AnnualCreditReport.com. This service provides a stripped down report that doesn’t give you a credit score. There is a charge for the version of the report that includes your score. Before you pay a third party that lenders won’t accept, remember that if you’re a serious mortgage shopper (rather than someone just monitoring your credit history for other reasons), you’ll need to allow a mortgage lender to run your credit report. That lender can brief you on your credit scores and history.