You likely have heard that too many credit inquiries can drag down your credit score. Although inquiries from lenders do appear on your credit report, a single denial will not ruin your credit. So a mortgage denial doesn't have to end your dream of owning a home. Still, when you are ready to make one of the biggest purchases of your life, all your ducks must be in a row. So if you have been declined for a mortgage, figure out why and try to correct the problems before you try again.
How Inquiries Work
Each time you submit a credit application, you give the creditor permission to ask the credit bureau for a copy of your credit report. A mortgage denial will not significantly lower your credit score. According to MyFICO, an inquiry lowers a score less than five points. If you apply for an auto loan, mortgage and several credit cards within a short period of time, your credit score may begin to feel the impact. Multiple inquiries on your report can also raise flags. MyFICO also states that, statistically, people with six or more credit inquiries in a short period are eight times more likely to file bankruptcy than an individual with no inquiries. So when you are in the market for a new home, it is best to avoid unnecessary inquiries.
The best way to get the lowest interest rate is to get quotes from different lenders. Credit bureaus don't punish you for being a smart shopper. When a credit bureau sees multiple inquiries for the same type of loan, it lumps the inquiries together. Rate shopping applies to mortgages, auto loans and student loans. It is best to limit your comparison shopping to a 30-day time span.
When you are denied for a mortgage, it's likely to affect your emotions more than your credit score. A denial is heartbreaking, but it doesn't have to keep you from purchasing your dream home. Discuss the reason for denial with the loan officer. To qualify for a conventional mortgage loan, most lenders require a minimum credit score of 620. Payment history makes up the largest portion of your credit score, accounting for 35 percent. Credit inquiries fall into the new credit category, which is 10 percent of a score. If the problem is not your credit score, it may be your debt-to-income ratio. Your mortgage payment cannot exceed a certain percentage of your income after subtracting other obligations. So if you have a car payment, student loan and a couple of credit cards, consider paying off some of the debt before you reapply for a mortgage.
Strategies for Approval
When you are ready to shop around again, a different approach might be all you need. Consider using a mortgage broker to find a loan. A mortgage broker has access to the entire mortgage market and can shop multiple lenders. Brokers have extensive market knowledge and know who will be willing to lend to you based on your credit and finances. If your credit score is not quite high enough for a conventional loan, an FHA loan may be an option. FHA loans are backed by the government and have more flexible criteria. You can also try aiming at a lower priced home.
Jeannine Mancini, a Florida native, has been writing business and personal finance articles since 2003. Her articles have been published in the Florida Today and Orlando Sentinel. She earned a Bachelor of Science in Interdisciplinary Studies from the University of Central Florida.