Buying a home means dealing a lot with your finances – and one of the most important pieces of that puzzle can be found in your credit report. Having a good score and a healthy debt-to-income ratio can mean the difference between getting a great mortgage or losing out on the house of your dreams.
Lenders and real estate professionals advise against making any changes to your credit history until after you buy your home, which means applying for that new line of credit is out of the question. Any credit inquiry may negatively impact your credit score, but lenders need to pull your report to help you pre-qualify for a loan. So how does multiple inquires affect your credit score as you continue to move forward on the path of your home buying journey?
There are two different kinds of inquires that show up on and affect your credit report: hard and soft inquires. Soft inquiries include credit monitoring services, checking your own credit, Insurance providers and Employer requests, as part of their identification needs. Depending on the company’s requirements, inquires by cell phone or cable providers, increasing an existing line of credit and opening a new bank account, may be either a soft or hard inquiry. To be safe, you should ask the company what type of credit inquiry will be made. Hard inquiries include things like credit applications, applying for a car loan, and – yes – a mortgage application. Hard inquiries can affect your credit score negatively, but it usually decreases only a few points. However, when credit bureaus see that you’re shopping for a home loan, they tend to be more lenient with home buyers because they know the process involved in securing a loan.
It’s the hard inquiries that your lender will be concerned about – particularly if you’re making the inadvisable step of taking on a lot of new debt in anticipation of your home purchase. Ultimately, lenders want to see that you’re a solid, stable borrower who doesn’t make rash financial decisions. Multiple hard hits on your credit report can make it appear that you’re a credit risk.
So how does it affect you when you’re shopping for a mortgage and request a pre-approval letter from a lender? Though it may seem like a pre-approval letter is a binding contract, that’s not entirely correct. While it gives you a clear picture of the rate, term and amount of loan you qualify for, based on your finances, it does not obligate you to any lender. You may receive pre-approval letters from multiple lenders and you can choose any lender to complete your loan application; you aren’t bound to one lender. As you work with different lenders to find the loan that’s right for you, Credit Reporting Agencies know that comparison shopping is part of the process, and will look at these multiple inquiries as one incident rather than several over a short period of time. Your lender might have an idea of how long the inquiries will remain on your credit report, so feel free to discuss the issue with them – but usually, the timeline is anywhere from two weeks to one month in order to give you time to comparison shop without too hard a hit on your report and score.
While it’s understandable that you would be concerned about how multiple hard inquiries can affect your credit score, it’s not going to decrease as much as you think it is – and in the end, it may benefit you, because you made the intelligent choice to shop around for the right loan for you. If ever you doubt the process, raise your concerns with your lender. They can help you understand how they pull and use credit scores throughout your loan process.