Window shopping can be a lot of fun, but when it comes to credit cards, mortgages, and other loans, potential homebuyers will want to make sure they understand credit inquiries and how shopping around can impact the potential to obtain a mortgage or the interest rate they’ll receive. Before shopping around for a mortgage or any other loan, read the following.
What are Credit Inquiries?
When someone applies for a loan or looks into getting prequalified, a credit inquiry is done. This is where the lender pulls the borrower’s credit report to see what the score is before determining whether or not to offer a loan. This is done with any loan, whether that’s a mortgage, getting a new credit card, or buying a car. When a credit inquiry is done, it appears on the credit report and can impact the borrower’s credit score.
Hard Versus Soft Inquiries
There are two main types of inquiries: hard or soft. Soft inquiries don’t impact the credit score, though they are visible to borrowers who want to check their credit reports. A soft inquiry could happen when a borrower is checking their own credit score or when a company pulls a customer’s credit score to offer a pre-approval. Sometimes these are done without the borrower knowing they will happen; soft pulls don’t impact the overall score.
Hard inquiries are the ones that can impact the borrower’s credit score and happen when the borrower does something to apply for new debt. Examples of times when hard inquiries are done include opening a new credit card, buying a car, applying for a mortgage, requesting a credit line increase, applying for an apartment, or setting up utility services. A hard inquiry does go on the credit report. When shopping around for a mortgage or other type of loan, any application that is processed will be a hard inquiry.
How Big is the Impact?
Hard inquiries can mean a higher interest rate or a lower chance for approval. In general, a hard inquiry will cause a score to drop between one and five points. This drop is generally temporary, but the hard inquiry does appear on the borrower’s credit history for two years. If the borrower makes a significant number of inquiries, the hard inquiries can add up and have a larger impact on the credit score, so it is important to be careful when shopping around.
Shopping Around for a Mortgage
Though a hard inquiry can impact the credit score, it’s unavoidable when looking for a mortgage. The good news is, if all of the credit pulls are for the same type of loan and done within a short period, it’s only going to lower your score as much as a single hard inquiry. If the borrower applies to five different mortgage companies to check out the rates, it’ll only have a single impact on the credit score. The amount of time for this does vary, so it’s a good idea to do all of the applications within about two weeks to be safe. This way, it’s possible to get the best deal on a mortgage, without worrying about multiple hard inquiries making the score drop significantly after each subsequent application.
How This Impacts Home Buying
There are two ways this can impact home buying. The first is the potential for a lower credit score. Lenders have minimum scores they’ll work with. If the hard inquiries drop the score below the minimum score, it may be more difficult to obtain a mortgage. For someone with a higher credit score, the drop could mean a slightly higher interest rate. Over the life of the mortgage, that can equate to thousands of extra dollars being paid in interest.
Hard inquiries can also impact a mortgage before closing. If the buyer does many hard inquiries right before closing, such as to get a new car loan or to increase their credit line, it can cause the score to drop and the mortgage may be at risk. It’s crucial to avoid any large purchases or opening any lines of credit right before buying a home. As soon as the closing is over, it should be safe to make these purchases, but always wait until after the closing is complete and the mortgage is obtained.
While window shopping can be fun, shopping around for a mortgage and other loans can be problematic when it comes time to buy. Understanding credit inquiries, however, can give you a better chance of preventing a drop in your credit score, allowing you to get a better deal on a mortgage.
