When you are preparing to buy a home, one of the most important steps is to select a mortgage lender and get your mortgage set up. The lender you choose and interest rate you get will affect you for years, so you should shop around and choose wisely. As part of the process of getting a mortgage, lenders may run multiple credit checks to determine your ability to borrow.
Effect on Score
Every time a lender obtains a copy of your credit report for a credit check, that lender's name appears on the section of your credit report that lists credit inquiries. If the lender pulled your report because you applied for credit, that inquiry can hurt your credit score. In general, a credit inquiry will lower your score by five points or less.
Ignore Recent Inquiries
The credit score formula ignores all inquiries from the past 30 days that appear on your credit report. This is helpful when you are rate-shopping for a mortgage because it allows you to compare lenders accurately. If an inquiry you got at another lender yesterday dropped your score for the inquiry you are getting today, this could affect your interest rate and skew your perception of which lender is better.
Ignore Multiple Inquiries
The credit scoring formula is also calibrated to recognize when you are rate-shopping and penalize you for just one credit inquiry rather than multiple ones. The most recent version of the FICO credit score formula as of August 2011 groups together inquiries for the same type of loan within a 45-day time period and counts them as just one inquiry on your credit score. However, the older credit score formula uses a shorter rate-shopping period of 14 days. Therefore, it is best to rate-shop within a 14-day window to ensure that all of the credit checks will be grouped together and only ding your score once.
Check Your Credit
Before you even go into a lender for credit checks, you can check your own credit. The credit score formula does not penalize you at all for pulling your credit report. You can get a free report from each credit bureau through the Annual Credit Report website. When you get your reports, look over them for errors and initiate disputes if you find any. Also calculate the utilization ratio on each credit card by dividing the balance by the limit. Try to pay down balances so all cards have a utilization of about 30 percent or less before you apply for a mortgage.
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