Although it may not have seemed like it after the ninth open house, finding the right home was the easy part. Actually getting the loan to buy it puts you at the mercy of lenders and leaves your financial situation exposed to prying eyes. You may be surprised both at how often lenders see your credit and how little it really matters.
When you apply for a loan, your lender will pull your credit report from each of the three major bureaus: TransUnion, Equifax and Experian. Some creditors only report to one or two of these bureaus, so by pulling all three, the lender sees a complete picture of your credit. If you are applying with a co-borrower or co-signer, the lender will pull his credit, too. If you shop around to multiple lenders -- you are shopping around, right? -- each lender will pull your credit, so the inquiries add up fast.
It Doesn't Hurt to Shop
You shouldn't hesitate to shop for a mortgage, because not every pull counts against your credit score. The prevalent credit scoring model, FICO, is set up so that inquiries won’t count against you for the next 30 days, which gives you plenty of time to find a good rate and a good house. After that, FICO bundles together all mortgage-related pulls within a period of either 15 or 45 days and counts them as a single pull.
Deciding on a lender and getting approved for a loan isn’t the end of the game. Preapprovals have an expiration date, so if a few months pass between getting the approval and signing the contract to buy the house, your lender will probably check your credit again. And right before you close on the loan, the bank may pull your credit yet again just to make sure you haven’t gone on a spending spree in the meantime. If you're lucky, the bank will make this check through a credit-monitoring service, which doesn’t count against your credit.
Effect of Numerous Pulls
Although credit pulls haunt your credit reports for two years, it’s not as bad as it sounds. The FICO score only considers inquiries within the last 12 months, and even then, pulls make up less than 10 percent of your score. According to a FICO senior scientist, each separate hard pull drops your score by less than 5 points. That doesn’t mean you shouldn’t worry about the second check, though. Changes such as significant new lines of credit can mean extra documentation for you to complete and could even scuttle your loan entirely, so walk on eggshells until you've safely closed.
- Kiplinger: Improve Your Credit Score Before Applying For a Loan
- MyFICO: Credit Inquiries
- The Mortgage Professor: Do Credit Inquiries Hurt Your Credit Score?
- The New York Times: The Advantages of Preapproval
- MyFICO: New Credit
- Los Angeles Times: Do Multiple Credit Inquiries Hurt FICO Scores?
- The New York Times: More Closing Jitters
- Keith Brofsky/Photodisc/Getty Images