Obtaining a loan is a necessary part of buying a home for most people, and it makes sense to shop around for the best terms before committing to one. Prequalifying for a loan online lowers your credit score, but the effect isn't cumulative when you make several inquiries. As long as they are mortgage-related and are made in a short period of time, only one counts against you, and it usually doesn't do much damage.
Credit Inquiries
Initiating a credit inquiry to prequalify for a loan adds a negative item to your credit report. It is different from an unsolicited inquiry by a third party seeking to determine your eligibility for a credit card or other promotional offer. Such soft inquiries have no effect on your score, but those you initiate yourself, or hard inquiries, represent an increased risk factor to the reporting agencies. Prequalifying for a home loan involves making a hard inquiry and accordingly has a negative effect on your credit score.
The Effect of Credit Inquiries
Credit agencies consider several factors when calculating your score. The two most important are your payment history and the amount you owe, together accounting for nearly two-thirds of your score, while new credit, which includes loan inquiries, accounts for only 10 percent. The number of inquiries you make is included in this percentage of your credit score, as well as the time that has elapsed since you made them. Thus, applying for several credit cards or personal loans in a short period of time could have a noticeable effect on your score, although the effect would gradually diminish over time.
Mortgage Inquiries Exempt
Most home purchases involve a certain amount of shopping for the best mortgage, so the credit agencies typically regard multiple prequalification inquiries as a single inquiry. Once the agencies record the first inquiry, they ignore all others within a 30-day period, no matter how many you make. Versions of the scoring system vary. An older one uses a 14-day period while the most recent one uses a 45-day period, according to the Fair Isaac Corporation (FICO), which calculates the scores. Lenders choose which version of the system to use when determining your eligibility for a loan.
The Impact on Your Credit Score
Although it depends on other factors in your credit report, the impact of rate-shopping on your credit score is usually minimal, according to FICO. Because it is considered a single credit inquiry, it typically lowers your score by less than five points. The effect may be more noticeable if you have a short credit history or few accounts open, or if your credit score is just above the threshold for qualification for a loan. However, factors such as your payment history and outstanding debts are more important than inquiries in assessing your creditworthiness.
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