When you apply for a mortgage loan, you authorize potential lenders to request a copy of your credit report from a credit bureau. Credit inquiries are then listed on your credit report. Although making multiple inquiries can make you look like a greater credit risk, rate shopping for a single mortgage loan affects your credit score differently. Certain types of credit inquiries can impact your credit score while others do not.
Making Multiple Inquiries
According to Fair Isaac Corporation (FICO), although multiple inquiries will show up on your credit report when you are shopping for a mortgage loan, this should not have much effect on your credit score. Inquiries made by mortgage, auto or student loan lenders within a 14-day period are treated as a single inquiry. Newer versions of the scoring formula allow for a 45-day rate-shopping period. As a result, your credit score will not drop by all that much.
Rate Shopping
In order to compensate for rate shopping, the FICO scoring formula ignores mortgage loan inquiries made in the 30 days prior to scoring. Rate-shopping is a normal step when it comes to finding the best home loan package to fit your financial needs, so lenders don't want to penalize consumers looking for just one loan. The length of time over which you make inquiries helps differentiate whether you are looking for a single loan or several new lines of credit. What you don't want to do is to apply for new credit cards or charge major purchases to existing cards at the same time as you are applying for a mortgage loan. A move like that could lower your credit score by increasing your debt ratio.
What Lenders Consider
Lenders take into account other aspects of a consumer's credit history when reviewing loan applications. In most cases, the number of inquiries listed on your credit report is only one small factor that lenders consider when assessing credit risk. Based on your individual credit history, inquiries can cost some consumers more points. Even so, a lender gives more attention to if you pay your bills on time as well as how much debt you already owe. Lenders also look for low credit card balances.
When Inquiries Matter More
For most people, inquiries have little impact on a credit score. However, if you have a short credit history, the number of inquiries listed on your credit report could have a negative effect on your score. A single credit inquiry can drop your credit score by up to five points. Credit scorers might think that you are continuing to apply for mortgage loans past the shopping period because you have been denied credit. This could lower your credit score. Usually, it's in a consumer's best interest to comparison shop and choose a lender within the customary shopping period. That way, multiple inquiries will count only as one.
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