Applying with different mortgage lenders could help you get a great deal on your mortgage. But will there be credit score repercussions?
If you're looking to buy a home, you're no doubt aware that the more competitive a mortgage rate you snag, the more affordable your home will be. In fact, it pays to shop around with different mortgage lenders when seeking out a home loan, because different lenders have different borrowing requirements. For example, one lender might reserve its top rates for borrowers with a certain credit score, while another lender might give out its best rates to borrowers with a decent, but slightly lower score.
There's just one problem with shopping around for a mortgage: Each time you apply for a home loan, the lender in question will perform what's known as a hard inquiry on your credit history. That's because it wants to ensure that you're a responsible borrower who can be trusted to repay the loan. But each hard inquiry on your credit record can lower your credit score ever so slightly.
A single hard inquiry shouldn't do a lot of damage. Usually, it'll result in a five-point drop or less, according to FICO, which isn't a huge deal. For example, if your credit score is 820, which is considered excellent, and it falls to 815 due to a single hard inquiry, that shouldn't hurt your chances of getting a mortgage or any other loan you may be applying for. But when you shop around for a mortgage, you apply to various lenders, which could result in multiple hard inquiries and a lot more credit score damage -- unless you're careful.
How to avoid hurting your credit while shopping for a mortgage
Thankfully, there is a solution for seeking out the best mortgage deals while keeping your credit score mostly intact: Follow the 45-day rule. If you apply for multiple mortgages within the same 45-day period, that activity will generally be recorded as a single hard inquiry on your credit history, since all of those individual inquiries will be made for the same purpose. And as we just learned, one hard inquiry won't really damage your score.
But what if you don't manage to find a mortgage rate that pleases you within 45 days? Should you automatically halt your search and settle?
Not necessarily. If you have really solid credit, then even a second hard inquiry shouldn't cause you much damage. But if your credit score is right on the cusp of being able to qualify for a mortgage, you'll need to be more careful.
Generally speaking, you'll need a credit score of at least 620 to qualify for a conventional mortgage (other mortgage types, like FHA loans, give you more leeway with a lower score than that). If your score is 625, you may not be able to afford multiple hard inquiries on your credit record. But if you're sitting on an 820 credit score, and you go beyond that 45-day window, don't sweat it.
That said, if your credit score is on the cusp of conventional mortgage eligibility -- meaning, you have a 625 or thereabouts -- it could pay to hold on your mortgage application for a few months and see if you can nudge your score upward. Paying off a bit of existing debt is a good way to do so quickly. Furthermore, if you find that you have not managed to get a mortgage offer that works for you within a 45-day time frame, it could pay to take a step back and think about why that is. It could be that your credit score just isn't high enough to snag the rate you want, in which case it could make more sense to improve it and then apply.
The mortgage rate you lock in could very well dictate how much interest you pay on your home loan for the next 30 years. Shopping around for the best deals make a lot of sense, and if you do so relatively quickly, you'll come away with your credit score largely unscathed.