Mortgage Shopping and Credit Scores

Written By: Glenn Michaels

Potential home buyers and borrowers need not to avoid shopping around for the best mortgage deal and for the house that they want. Is it smart to have multiple lenders to run credit reports since each credit report will chip away their credit scores.

The idea that a flurry of credit inquiries from mortgage lenders will lower a borrower’s scores is a common misconception, experts in the know say. The truth is that six (6) inquiries are likely to have no more impact than one inquiry if they are spread over time.

When it comes to mortgages, as well as automobile financing and even student loans, the scoring systems there is logic in place that protects consumers credit scores from any negative impact caused by multiple inquiries as a result of rate shopping if the inquiries are made within a compressed period of time.

FICO (the scoring model required by Fannie Mae and Freddie Mac), credit inquiries for mortgage loans that are less than 30 days old are ignored and no impact. Inquiries older than 30 days are looked at, but multiple inquiries from mortgage lenders made within 45 days of one another are treated as one inquiry. Some scoring systems give less time such as Vantage Score (14 days).

Both scoring systems assume that if someone has multiple mortgage related inquiries in a short period, they are likely shopping for the best deal for a single mortgage.

If one of the multiple mortgage inquiries occurs outside the allowable period of time, a day or two it would be counted as a second inquiry. One or two credit inquiries does not result in a significant credit score decline.

Borrowers should always review their credit reports prior to shopping around for the best deals as there could be credit report errors on the credit report. Consumers now have the time to correct those errors. Consumers with large balances also have the chance to pay them down to become a better candidate for a mortgage loan.

Credit disputes if handled correctly by writing to the credit bureaus with proper documentation regarding the credit dispute will not impact a borrower’s credit score. In some cases a credit dispute will increase the credit score.

The rate and points due to risk based pricing is often impacted by the credit score. Borrowers with high scores have preferred rates and points. Borrowers with lower scores may have to put a larger down payment on a home to obtain a mortgage. That is why it is important to review your credit report before you go out to buy your home and to obtain mortgage financing.

One example how the down payment is impacted is the FHA program. Borrowers with a decision score of 580 or more are eligible for maximum financing (3.5% down or 96.50% financing). Borrowers with a decision score of 579 or less but not lower than 500 must put 10% down. Providing they can find a lender willing to grant credit with a decision score of 500 – 579.



About The Author

Glenn Michaels - As an NAMP® staff writer, Glenn Michaels is a mortgage underwriting instructor for Mortgage Underwriter University (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years. If you're interested in becoming a writer for NAMP®, please email us at: contact@mortgageprocessor.org.

 


Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.