Does Getting Rejected for a Mortgage Affect My Credit?

If a lender rejects your application for a mortgage, the most that can happen is a hit to your ego. Your credit may see a drop of a few points, but this happens whether or not the lender accepts your application. Also, the way the FICO credit scoring system handles inquiries allows you to keep applying for the next few weeks without any further consequence to your credit rating.

Identification

A rejection of a mortgage application does not affect your credit score any more than an approval. The credit reporting bureaus ding your credit score because you applied for credit in the first place. A single inquiry does no more than five points of damage, so the application probably won't affect your ability to get a mortgage or impact the interest rate, unless you are very close to cutoff points. Inquiries can do significant damage when you apply for several different types of credit within a year.

Considerations

Rejection for any type of credit should concern you. The lender must give you a reason why it rejected your application when it takes an "adverse action" because of your credit history within 30 days of the application submission date. However, the lender may have had another reason for rejecting the application. For example, the lender, may believe that the loan you requested was too much compared with the market value of the home or that your income cannot support a mortgage.

Rate-Shopping

The most used credit scoring formula in the U.S., the FICO system, allows you a certain amount of time to shop for a mortgage with all applications counting as a single inquiry. This time frame depends on the version of the FICO formula employed by your lender. The latest FICO -- as of July 2011 -- is FICO 08 and gives you 45 days to put in as many mortgage applications as possible. Early versions only allow you 14 days, according to the Fair Isaac Corporation.

Tip

The mortgage company must provide you a free credit report if it rejects your application for a mortgage based on something in your credit report, and you ask for a copy of your report within 60 days of receive a letter of adverse action, according to the Federal Trade Commission. Look for errors and negative items on your credit report, such as late payments and delinquent accounts. Dispute errors with the credit bureaus and prepare evidence to back up your claim. Ideally, you should do this before you apply for the mortgage, because it may take several months or years to rebuild a poor credit history.