By Ashlee Valentine, Bankrate.com
Part of the homebuying process involves shopping around with multiple lenders for the best mortgage rate. But without a plan, the very act of shopping around can negatively impact your credit: A higher credit score helps you secure a lower mortgage rate, but a hard credit inquiry like the one lenders perform can decrease your score. Here’s what to know about shopping for a mortgage with minimal harm to your credit.
When exploring mortgage options, your credit score typically takes a hit when you obtain a mortgage preapproval from a lender. That’s because part of getting preapproved includes the lender checking your credit through what’s called a “hard” inquiry. A hard credit inquiry involves a lender pulling your full credit report from a credit bureau, with your permission, which helps them decide whether to lend you money and at what interest rate.
A soft credit inquiry, on the other hand, does not impact your credit score or require your permission. It is typically done for informational purposes and not for lending decisions. A mortgage preapproval with only a soft credit check is hard to come by.
One step down from a preapproval is a mortgage prequalification. Although it does not replace a preapproval, prequalifications involve a only soft credit inquiry. In other words, you can see if you prequalify without hurting your credit score.
Can you get preapproved for a mortgage without a credit check?
No. Hard credit checks are a standard part of the mortgage preapproval process. While you can get a prequalification without a hard credit check, you cannot get preapproved without one.
Even so, you may hear the terms “prequalification” and “preapproval” used interchangeably, even by lenders. So it’s smart to check with lenders that their prequalification process doesn’t require a hard credit check before moving forward.
There are several ways to avoid a negative impact on your credit score when shopping for a mortgage:
Shop within a short timeframe
It’s wise to compare offers from multiple mortgage lenders, but be sure to do it within a 45-day time frame. During that period, all credit inquiries by various lenders only show up as one inquiry on your credit report. One inquiry has a lesser impact on your credit than several inquiries.
Get prequalified for a mortgage
Getting prequalified for a mortgage — some lenders call this a rate check — can be a smart strategy if you’re concerned about damaging your credit score as you comparison-shop. This gives you a soft credit check mortgage exploration option.
Keep in mind: While getting prequalified can help minimize damage to your credit score, it’s no substitute for getting preapproved when the time comes. In a competitive seller’s market, a preapproval is often necessary to prove to sellers you’ll be able to get financing if your offer is accepted.
Hold off on applying for new credit
If possible, wait until you officially close on your mortgage before applying for more credit types, such as a new credit card or a personal loan. Multiple inquiries for different types of credit can negatively impact your credit score, hindering your efforts to get a competitive mortgage rate. Even if applying for a credit card only drops your score by a few points, that could make a difference in your interest rate, especially if you’re on the cusp between “good” and “very good” or “fair” and “good” credit.
In addition, adding new debt can impact the loan amount you can qualify for. The more debt you have, the less mortgage you will qualify for.
Check your credit report
If you check your credit report before comparison shopping for a mortgage, you can take proactive steps to improve your credit score if needed. You’ll also be able to spot and fix any errors. Things to check for include:
- The correct personal identity information (names or contact information you don’t recognize could indicate identity theft)
- Correct information on all open and closed accounts, including loans you’ve fully paid off
- Accurate recording of all payments you’ve made (pay special attention to any payments flagged as missed or late)
- Account balances that match your actual balances
- Credit score inquiries to confirm they’re ones you approved
If something doesn’t look right, take steps to dispute and correct it.
You can get a free copy of your credit report from each of the three major credit reporting agencies each week at AnnualCreditReport.com. Don’t worry — checking your credit report won’t affect your score.
Keep in mind: The credit score you see on free credit reports might differ slightly from the score mortgage lenders see if they use different credit reporting models.
Pay down debt
If your credit score could use improvement, one of the best ways to raise it is to pay down your debt, like credit card balances. If doable, pay off a credit card balance in full — with bonus points for keeping the balance as low as possible moving forward.
It might make more sense to pay down or pay off another loan instead of putting all of your excess funds toward eliminating credit card debt, even if the credit card debt has a higher interest rate. That’s because mortgage lenders review your debt-to-income (DTI) ratio through the lens of monthly payments.
For example, if your DTI ratio is a bit high and your student loan payment is higher than your minimum credit card payment, it is better to focus your debt payoff strategy on the loan, which would lower your DTI ratio. In cases like this, it’s helpful to consult an experienced loan officer who can advise you on the best ways to qualify for the lowest rates.
How to improve your credit score
The most attractive interest rates are reserved for borrowers with the best credit scores. With a score of 740 or higher, for example, most lenders will offer you a lower interest rate, reducing your monthly payment.
Once you’ve resolved any errors on your credit report, here are some additional ways of how to improve your credit score:
- Make all payments on time each month: Payment history is a substantial factor in determining credit scores, and it makes sense that mortgage lenders care about being paid in a timely manner. If you have accounts that are past due, bring them current as soon as possible.
- Pay down credit card balances: Paying down credit card balances decreases your credit utilization ratio, which accounts for 30% of your FICO credit score.
- Avoid opening or closing accounts: Opening new accounts involves another hard credit check, which dings your credit score. And closing old accounts, even if you never use them, may negatively impact your credit utilization ratio.
- Consider becoming an authorized user on a relative’s credit card: Only consider this option if they have an exceptional payment history and manage the card responsibly.
FAQs
How many mortgage lenders can I approach without impacting my credit score?
If you’re only asking questions or requesting prequalification, you can approach as many lenders as you want without hurting your credit. But even if you’re requesting preapproval, there’s no set amount for how many lenders you can approach — as long as you make all your requests within a single 45-day period, you can get preapproved by as many lenders as you want and have it count as only a single inquiry on your credit report.
Can I receive mortgage rate quotes without a credit check?
Yes. You can get a mortgage loan estimate through prequalification, which does not require a hard credit check and will not hurt your credit.
How long do mortgage inquiries stay on my credit report?
A hard inquiry may stay on your credit report for as long as two years. However, the inquiry itself typically only impacts your score for about one year.
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