Knowing where you stand credit-wise before shopping for a home loan can save you both time and money. Lenders employ a matrix of sorts that combines a down payment amount and credit score to come up with a mortgage rate for a borrower. For example, someone with a credit score of 750 and a 20 percent down payment can get a better rate than someone with 5.0 percent down and a 600 score. To understand how credit inquiries work and how they can affect your credit scores, you need to understand the impact as well as the true definition of a credit inquiry.
In its simplest form, a credit inquiry is someone asking about your credit. This inquiry can come from you or it can come from a credit card company looking for more customers. A credit inquiry can also come from an employer in certain industries where money and financial transactions are handled. Beyond a credit inquiry, there are four other factors that determine your credit score. They are payment history, available credit, length of credit history and types of credit. Each has its own impact upon the calculated credit score.
Payment history which reports when payments were made on credit accounts makes up 35% of the total score while available credit- the amount of outstanding balances compared to credit limits- are attributed 30% of the score. How long someone has had credit accounts for 15% while types of credit and credit inquiries take up the remaining 10% each.
While credit inquiries don’t have as much impact on a credit score as other factors they do matter, especially when someone is barely above the minimum credit score requirement. If a mortgage program with 10% down requires a 620 score and the borrower’s reported score is 620, just a single point drop could cause some concern. Yet unless the borrower makes a specific request for a credit account, the inquiry won’t impact the score. For example, a credit card company looking for new customers has the ability to look at someone’s credit to see if they want a new credit card. That initial inquiry doesn’t hurt. However, when the consumers actually completes a credit application, that counts as a credit inquiry.
Credit isn’t affected with one or two inquiries per year. However, when multiple credit inquiries are made around the same period of time, that can hurt credit scores. The algorithm used to calculate credit scores treats multiple credit inquiries as a potential problem as someone might be having trouble financially and applies for various credit accounts. For example, someone is about to be laid off at work so they apply for multiple credit card accounts to provide some sort of financial cushion while they’re out of work. If they’re out of work for too long, soon their credit lines would vanish and later can’t afford the monthly payments. Occasional requests for credit are okay, multiple requests and therefore multiple credit inquiries aren’t.
Okay, so what happens if you’re out shopping for a new car and visit several dealers who all want you to fill out a loan application? In this scenario, when the credit request is for the same transaction, the credit inquiry won’t harm scores. It’s understood that you’re not buying three new cars but shopping for just one.
This is the very same regarding applying for a mortgage. When shopping for a mortgage, a lender can give you an interest rate based upon certain assumptions. You can all around and speak to a few loan officers and get interest rate quotes. The loan officer will ask a few questions to get an idea regarding your needs and then quote a rate based upon your conversation. Yet there’s nothing official about the conversation nor the interest rate quoted.
Instead, you’ll need to fill out a loan application and give the lender permission to pull a credit report. If you contact another loan officer and give permission for the loan officer to also pull a credit report, you now have two credit inquiries. However, it’s for the very same transaction for both a purchase or a refinance loan. Your two credit inquiries occur at approximately the same time for the same purpose- getting a home loan. In this instance, your credit inquiries will not harm your scores.
If you stretch this process out over the next several weeks and even more mortgage companies pull a credit report, at some point your scores will begin to fall. The exact date and time when more inquiries for a mortgage isn’t really known, just as a rule however, it’s okay to have more than one credit inquiry for a mortgage if it’s for the same transaction.
Credit Inquiries : One More Thing
Lenders look at credit inquiries for another reason as well. When lenders pull your credit, they do so upon application and then one more time right before you close on your loan. Why do they do that when they already have a copy of your credit report and have your credit scores? They want to know if you’ve applied for credit during the time your loan was being processed.
For example, you apply on the first of the month and your credit report is pulled. And right before the lender orders your final loan documents, they also pull a report to look for credit inquiries. If someone has an initial approval and the lender sees a new credit inquiry for an automobile loan, the lender will stop the loan process and require the borrower to provide documentation of any new automobile loan and if there is a new loan, the monthly payment must be documented, the loan must be approved once again with the new information and the loan goes back into underwriting.
If the individual was thinking of buying a new car and applied for a loan but decided later to nix the idea, the lender will still want something in the file that states the borrower applied for an auto loan but decided against it. Any new credit inquiry can cause problems. That’s why loan officers tell their clients at the outset to not apply for any credit while the loan is being approved. Credit inquiries have a relatively small impact on a borrower’s final credit score, but when it does have an impact, sometimes it’s hard to recover.
“Chad and his team are exactly who you want handling the financing of your home. Whether it be a new purchase or refinance, he and his team are one of the most professional, responsive group of people I’ve worked with. Buying a home can be very stressful and Chad and his team took all of the necessary steps to make the process as painless and as quick as possible. They are extremely knowledgeable, organized and have great follow through. You won’t ever be left wondering what the next steps are. I highly recommend him and will use him in all of our real estate transactions moving forward.”
I highly recommend Chad Baker. He does a phenomenal job and won’t trauma you or your clients. He has a whole team that works on the loans. And all the team members are great. He has a person that can translate for your clients that are Chinese. He is as good of a loan officer as you are an agent, and that is what you want when referring clients to a lender.
“Chad and his group made the mortgage approval process smooth and understandable. Multiple updates and explanations during the process kept me informed of progress. Chad also provided great advice on other home services, in particular an insurance company that saved me thousands of dollars a year on home and auto insurance.”