One of the first things a lender will do when you apply for a mortgage is to pull your credit score to see how you have handled debt in the past. Because you probably will submit multiple mortgage applications so you can compare rates, knowing how the inquiries will affect your credit score will help you better plan your mortgage application strategy.
What are Credit Inquiries?
Credit inquires refer to when you apply for new loans or lines of credit, including mortgages, refinancing and home equity lines of credit. When you apply and the lender pulls your credit score, the credit bureau notes an inquiry on your credit report. Each inquiry remains on your credit report for two years, though, according to the Fair Isaac Corporation (FICO), the leading credit scoring provider, it only affects your credit score for one year.
How Are Mortgage Inquiries Treated?
Credit scoring models treat inquiries resulting from mortgage applications differently than most other inquiries, such as credit cards or unsecured loans. Because the credit scoring algorithm expects people to shop around for a mortgage, it counts mortgages applied for in a short period of time as a single inquiry. The period of time, sometimes referred to as the "shopping window," ranges from 14 to 45 days, depending on which version of the FICO scoring model is used.
How Does it Affect the Score Lenders See?
When you apply for a mortgage, the credit scoring formula does not count mortgages that you have applied for in the past 30 days against your score. For example, if you applied for three mortgages in the past week and you apply for a fourth the next week, the other three mortgage applications would not affect your credit score. Therefore, you will have just as good a chance to get a low interest rate at the last bank you apply to as the first.
Considerations
Your applications for new credit account for 10 percent of your credit score, meaning 90 percent of your score comes from other factors. FICO breaks down the remaining portion of the score as 35 percent from your payment history, 30 percent from the amount of debt you have, 15 percent from the length of your credit history and 10 percent from the types of credit you use. Checking your credit report to remove any errors before applying for a mortgage can help improve your chances of getting a good interest rate.
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