If there’s one thing every borrower must do when looking for a mortgage, it’s go rate shopping. You shouldn’t assume the offer you received from one lender is the only offer you’ll get. It may not be the best offer either. Wouldn’t you rather shop around to see what others lenders might offer you?
Many people are worried about shopping around because it will affect their credit score. While it’s true that your score will be affected, there are ways around it.
Understanding the Hard Inquiry
First, you should understand the difference between a hard and soft inquiry. A hard inquiry is the one that you see on your credit report. It’s the one that affects your credit score. A soft inquiry, on the other hand, doesn’t affect your credit score and other lenders won’t even know it happened. So when does each inquiry occur?
- Hard inquiry – Lenders initiate a hard inquiry when you are serious about applying for the mortgage. This isn’t just a preapproval where you are trying to see what you can afford. You actually complete the mortgage application and submit it to the lender.
- Soft inquiry – Lenders initiate a soft inquiry when they are just trying to get an idea of your credit score/credit history. They aren’t actually lending you any money at this point.
When you are ready to apply for a mortgage and start rate shopping, you will have hard inquiries from each lender on your credit report. Again, while this could hurt your credit score, there are ways around it.
Generally, you have a short window to complete you rate shopping. This means you shouldn’t apply for a mortgage with Lender A today and then not apply with another Lender for another 2 months and think you won’t be hit with two inquiries.
The credit bureaus recognize the need to shop around, but they expect you to do so within a matter of weeks. If they see too much time in between your applications, they won’t know if you applied for a mortgage on the same property or if you are trying to get funds for another property. As long as you shop within a short amount of time, lenders will generally count your applications as one inquiry.
Think of it like this, if you apply with four mortgage lenders, chances are you are not trying to get four mortgages. The credit bureaus understand this. But if you had inquiries from four different credit card companies, there’s a good chance you could now have four brand new credit cards to use. That’s potential for a lot of debt. Each of those inquiries would likely count as separate inquiries, damaging your credit score quite a bit.
In general, one credit inquiry hits your credit score 5 points. Again, when you shop around for a mortgage, though, you’ll likely only get hit once for shopping around.
Now that you know that you can shop for a mortgage with multiple lenders without hurting your credit score, it’s important to know how to do it. There is a right and wrong way!
Take the following steps to help you get the best mortgage rate:
- Find at least 3 or more lenders to get a mortgage quote from
- Shop within a 2-week period so that the rate quotes you get are similar based on the timeframe
- Shop with different types of lenders, such as banks, credit unions, and mortgage brokers
The bottom line is that your credit score will be affected when you go rate shopping. Just how much it is affected depends on you, though. If you do it smart and shop within a short time span, you’ll likely only see a 5-point difference in your credit score. That small of an impact won’t do much to your credit score or your ability to secure a mortgage.