You’ve decided to buy a new home, and like a majority of Americans, that means you’re also signing up for a mortgage. A mortgage can be a great thing for your credit history. In today’s market, interest rates are also at all-time lows, which means the cost of financing your mortgage may be less than ever.
Your credit score is the key to getting approved for a mortgage and will help determine which loan programs you’re eligible for and your interest rate. You’ve probably heard that hard credit inquiries, like a mortgage application, ding your credit score. In this post, we break down how applying for a mortgage affects your credit score, how you can shop for the best rate and protect your credit, and what that means for when you should apply.
Hard Inquiries on Your Credit Report
Once your complete your mortgage application, your lender will check your credit report at all three of the major U.S. credit bureaus. This type of credit check is called a hard inquiry, and it can temporarily lower your credit score. You will be able to see these inquiries with a credit monitoring service if you use one. These inquiries typically only impact your score for one year but stay on your report for two years.
What if I Apply Through Multiple Lenders?
As you’re shopping for a mortgage and looking for the best loan program for your financial situation, you may apply at multiple lenders. The credit bureaus understand this behavior and typically count multiple hard inquiries for the same type of line-of-credit within a specific time frame as a single inquiry. For example, FICO counts additional inquiries within 45 days as a single instance.
Why Does a Credit Check Lower My Score, Even if Only Temporarily?
Sometimes it helps to know why something is the way it is. FICO explains that opening several new accounts in a short time period can be an indicator of greater credit risk, such as someone defaulting on those obligations. Their scoring system reflects that amount of risk given the type of loan you’re applying for and your credit history.
You don’t need to worry about inquiries too much, though, since they only make up a small percentage of your credit score calculation. In the FICO scoring model, inquiries make up just 10% of the score. Paying bills on time and your debt-to-income ratio are much larger components of your score
How a Mortgage Helps Your Credit
It’s also important to think further out than just the implications of the mortgage application on your score. Since you’ll be paying your mortgage for many years, it can help your credit report substantially over the long term.
Your home loan can contribute to your on-time payments and the length of your credit history. These two factors together make up about half the calculation of your score. When you consider the importance of buying a home and how a mortgage can positively impact your score, a short-term dip in your score from your application is far outweighed by the benefits of owning a home.
When Should You Apply for a Mortgage?
As we reviewed in an earlier section, the credit bureaus’ scoring formulas take into account that consumers shop for the best rates and compare different loan programs. Each bureau will differ slightly in its treatment of multiple inquiries. FICO recommends focusing your rate shopping in a 30 day period, which raises the question of when you should start applying.
The short answer is there is no magic answer. Instead, you should consider these key indicators:
- Your credit score. Is it high enough to qualify for the loan program of your choice?
- Your income. Do you have a history of a steady and increasing income?
- Your savings. Do you have enough saved up for your down payment?
- Your debt-to-income ratio. Do you have a DTI of 43% or less, which will help you qualify for loans easier?
If you’re in good shape in these major areas, and you’re personally ready, then you know it’s the right time to move forward and begin your mortgage journey.
Our goal is always to give you the tools to understand the mortgage process. Another great resource to help you as become a homeowner are our loan officers. They are well-versed and prepared to answer any questions you may have as you’re getting ready to buy a home.
Connect with our team to get started on your application or if you have more questions about the process.
The included content is intended for informational purposes only and should not be relied upon as professional advice. Additional terms and conditions apply. Not all applicants will qualify. Consult with a finance professional for tax advice or a mortgage professional to address your mortgage questions or concerns. This is an advertisement. Prepared 2/25/2021.