What Are Credit Scores, and Does Shopping For A Mortgage Affect Them?
A credit score predicts how likely you are to pay back a loan on time. Companies use a mathematical formula – called a scoring model – to create your credit score from the information in your credit report. This scoring model uses information from your credit report to create a credit score. Some factors that make up a typical credit score include:
- Your bill-paying history
- Your current unpaid debt
- The number and type of loan accounts you have
- How long you have had your loan accounts open
- How much of your available credit you are using
- New applications for credit
- Whether you have had a debt sent to collection, a foreclosure, or a bankruptcy, and how long ago
Companies use credit scores to make decisions such as whether to offer you a mortgage, credit card, auto loan, or other credit product. They are also used to determine the interest rate you receive on a loan or credit card, and the credit limit.
Keep in mind there is no “one” credit score. It is important to know that you do not have just “one” credit score and there are many credit scores available to you as well as to lenders. Any credit score depends on the data used to calculate it, and may differ depending on the scoring model, the source of your credit history, the type of loan product, and even the day when it was calculated.
Usually a higher score makes it easier to qualify for a loan and may result in a better interest rate. Most credit scores range from 300-850.
What exactly happens when a mortgage lender checks my credit?
The credit check is reported to the credit reporting agencies as an "inquiry.' Inquiries tell other creditors that you are thinking of taking on new debt. A mortgage inquiry typically has a small impact on your credit score (typically 3-5 points). Inquiries are a necessary part of applying for a mortgage, so you can't avoid them.
As the section below explains in greater detail, the effect is minimal, because within a 45-day window, multiple credit checks from mortgage lenders are recorded on your credit report only as one single inquiry. Also, as a general rule, apply for credit only when you need it. Applying for a credit card, car loan, or other type of loan also results in an inquiry that can lower your score, so try to avoid applying for these other types of credit right before getting a mortgage or during the mortgage process.
Will Shopping Around for a Mortgage Hurt My Credit Score?
No. Don’t believe the myth that some lenders will tell you.
According to the Consumer Financial Protection Bureau (CFPB): “You can shop around for a mortgage and it will not hurt your credit. Within a 45-day window, multiple credit checks from mortgage lenders are recorded on your credit report as a single inquiry. This is because other creditors realize that you are only going to buy one home. You can shop around and get multiple preapprovals and official Loan Estimates. The impact on your credit is the same no matter how many lenders you consult, as long as the last credit check is within 45 days of the first credit check. Even if a lender needs to check your credit after the 45-day window is over, shopping around is usually still worth it. The impact of an additional inquiry is small, while shopping around for the best deal can save you a lot of money in the long run. Note: the 45-day rule applies only to credit checks from mortgage lenders or brokers' credit card and other inquiries are processed separately.” Click here for more details.
Additionally, you can check your own credit with no impact on your score. When you check your own credit — whether you're getting a credit report or a credit score — it's handled differently by the credit reporting agencies and does not affect your credit score. If you are applying for a mortgage and haven't already checked your credit report for errors, do so now. You can get a free copy of your credit report at www.annualcreditreport.com. If you find any errors, get them corrected as soon as possible.