When you apply for a purchase mortgage, the lender pulls your credit. That’s how they see what type of financial responsibility you have. If your credit score is too low, they won’t move forward with your loan application.
Each time you have an inquiry on your credit report, meaning you applied for new credit, your credit score falls five points. What if you want to shop around to get the best interest rate and/or terms on a mortgage loan? Will you get hit five points every time you apply for a loan?
Luckily, the answer is ‘no,’ but only if you follow the rules.
Shopping Around is Okay
Lenders know that you shop around for a mortgage. It just makes sense since each lender has their own terms, rates, and fees. You want to find the lender that offers the best option for you. Credit bureaus understand this need and do allow you to shop around without damaging your credit score too much.
Since you are shopping for the same type of loan, the credit bureaus only hit you for one inquiry. This means you can shop at Lender A, B, and C and only lose five points on your credit score for an inquiry. But this doesn’t mean you can apply with Lender A today, Lender B three weeks from now, and Lender C two months from now.
Make it Quick
Credit bureaus typically count multiple inquiries for the same type of loan that occur within a 2 to 3-week period as one inquiry. The faster you shop around, the less likely it is that you’ll be hit with more than one inquiry.
What if you can’t shop that quickly? You don’t have to worry. If you spread your inquiries out over a few month span, they won’t accumulate to damage your credit score. Inquiries typically only lower your credit score for 30 days. While the inquiry will still show on your credit report for future lenders to see, it won’t affect your actual credit score.
Apply for a Pre-Qualification
If you are unsure about what your next step will be, but you want to know an estimate of what lenders will give you, you can apply for a pre-qualification and not damage your credit score. Lenders can pre-qualify you for a mortgage without pulling your credit.
Instead, lenders go off what you tell them. It’s a good idea to have a good estimate of your current credit score, which you can usually get from your free credit score reporting from most credit card companies or banks. You will also tell the lender how much you make per month and what debts you pay each month.
The lender will use the provided information to determine what you may qualify to receive. They call it pre-qualification. It’s different than a pre-approval. A pre-qualification is not a guarantee of a loan by any means. A pre-approval on the other hand, is one-step closer to the actual approval because the lender will pull your credit and look at your actual paystubs and bank statements.
If you want to know approximately what a lender will give you, go ahead and apply for the pre-qualification. If you are ready to take out a loan now, shop around, but do it as quickly as possible. Once you have three or four quotes, you can get a fair idea of what you qualify to receive and which lender has the best interest rates and terms for your loan.