Why Applying For A Mortgage Does Not Automatically Tank Your Credit Score

There is a fair amount of misconception that applying for a mortgage causes your credit score to drop each time. Not the case. The sole act of having your credit report in conjunction with submitting a loan application to a mortgage company does not automatically constitute a reduction in your credit score. Here’s the skinny…

When you apply for a mortgage loan, you authorize a mortgage company  to obtain the most accurate comprehensive detailed financial credit report available. More accurate than any one score credit report, auto loan credit score or a personal crediting reporting service score, a  financial services provider credit report is king in lending world. Comprised of three different credit scores; one from each bureau, the lender will use the middle of the three scores for determining loan eligibility.

It is well known the federal government encourages borrowers to be savvy smart consumers by shopping for mortgages comparing rates and fees. A lender’s rates and fees only hold water with a credit report in hand from that individual mortgage provider, coupled with the consumer’s financial documentation.  This is why your credit score is not penalized when you apply for a home loan, with one caveat-complete your comparative price shopping within 30 days.

Mortgage Credit Report A Hard Inquiry

Applying for a mortgage does show up as a credit inquiry on your credit report. Too many total credit inquiries over time may slightly drop your score because it looks like you’re shopping for credit, demonstrating a possible inability to manage your liabilities. Credit shopping for multiple different forms of credit is often confused with a mortgage lender checking your score.

For example a credit pull such as a mortgage inquiry, followed by a car loan inquiry, followed by a credit card inquiry or two for example or any other forms of credit in all while applying for a mortgage too, may hurt your score. However, if you are not shopping or looking for any other form of credit other than a mortgage, your credit score is not in peril.

Why Scores May Be Different Amongst Mortgage Companies

Let’s say you’re applying for a mortgage with direct lender and your middle credit score is 740. Being a smart customer, you decide to do your due diligence by also comparing another mortgage company and your credit score is now 739. The 1% drop in score should not be immediately attributed soley to result of pulling credit, but rather the rest of the credit picture as whole.

It all boils down to when your other credit accounts, and other revolving lines of credit you have open are reporting to the credit bureaus with current activity. If you have several credit cards for example and each one of these accounts report to the credit bureaus at a different times of the month based on your spending, payment and balance activity, that could change the scores generated between the mortgage companies you’re considering using for your mortgage loan.

Credit Reports Are Not Universal

Each credit report is only for use with that lender whom you applied with. Mortgage tri-merge credit reports are not transferable amongst lenders nor is it reasonable to assume, your credit scores from each bureau are going to be exactly the same with a different lender. Each time you apply for a mortgage or want actionable rates and fees, you have to agree to let the mortgage company whom your considering using to pull your credit report, just that simple. Pulling credit and generating a score is the only to procure mortgage pricing accuracy. Moreover, if there’s anything related to your credit history that could be problematic, this can be taken care of upfront to prevent a surprise from popping into the process later on threatening the deal and/or financing terms.

These Items Hurt Your Credit The Most When Getting A Mortgage

  • Late payments on any of the following: any loans of any kind in the last 36 months month (the more recent, the worse it affect their is on score)& credit cards
  • High utilization of credit: all credit you have is near the max on each credit limit per account
  • Lack of credit: you need to spend to get credit, doing so demonstrates financial responsibility especially if the account is paid off in full each month with at least five open and active credit accounts
  • Age of credit: if you’re doing right, keep at it and over time your credit will rise and age of paid as agreed credit bolsters your scores, all of them
  • Foreclosures, Bankruptcies, Short Sales: if applicable to you its generally 2-3 out to be mortgage eligible again depending on specific credit event

*If any of these are indicative of your financial situation and you’re perception of what you think your score is changes after applying for a mortgage, the likely culprit for any credit changes can more than likely be tied to one or more of the above following items in relationship to any credit disparity.

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