If you’ve ever shopped for a big-ticket item, such as a new television, mattress or car, part of your pre-purchase research undoubtedly included shopping around. After all, these are big purchases and you want to make sure you’re getting the best deal. Why would you ignore this basic principal when financing or refinancing your home?
This is one of the biggest financial decisions you will make during your lifetime, and too often we learn that homeowners are simply accepting the rate given to them by their local bank – no shopping involved. Perhaps this is out of convenience, but it’s important to understand you’re not always getting the best rate simply because of the relationship you have with your lender.
It's also for homeowners to fear hurting their credit score by shopping around. This is one of the most popular old wives’ tales in our industry. Let’s dig into why this really isn’t cause for concern.
Can rate shopping damage my credit score?
When you apply for a mortgage, you are giving the lender permission to access and pull your credit report. A lot of people worry about what shopping around for rates will do to their credit scores, since multiple applications or inquiries into credit can be a red flag to indicate a high risk to your creditors – and can ding your overall credit score, in the process.
However, it is important to understand that there are different types of credit inquiries – and they affect your credit score in different ways.
Different Types of Credit Inquiries
All credit inquiries are not created equal. Only certain kinds of credit inquiries can and will impact your credit score, and fortunately, there is some degree of a built in allowance for rate shopping.
Most of the time, your credit score will not be affected by multiple inquiries made from mortgage lenders within a short window of time (usually 30 days, or so). In these particular instances, multiple inquiries are generally treated as a single inquiry and, therefore, should have little to no impact on your credit score.
However, there are three tips to keep in mind, to further safeguard and protect your credit score when you do decide to shop:
1. Conduct all of your business as quickly as possible. While you will generally have a 30-day grace period for all of your credit inquiries, you may be better served if you act even faster. Try to think of your month long window more like a weeklong grace period. Have a list ready of all of the lenders you want to research, and then complete all of your applications within a few days.
2. Keep your applications consistent, in type and amount. For instance, on a credit report, when four different lenders pull your credit for a $500,000 mortgage loan, it is fairly evident that you don’t have any intention of purchasing four homes at $500,000 each.
3. Do not apply for any other lines of credit while you’re researching and shopping mortgage rates. Applying for too many lines of credit or loans at one time can be a red flag, making you look like a high risk to potential lenders.
Hard vs. Soft Credit Inquiries
Another distinction among credit inquiries is hard inquiries versus soft inquiries. A hard inquiry is one where a landlord, bank, mortgage lender, or other creditor accesses your full credit report, due to a transaction that you initiated. The key distinction here is that this is an inquiry that you initiated, by specifically asking for a line of credit from a lender. This is the only type of inquiry that will affect your credit score if the guidelines above are not followed.
The other types of credit inquiries are a soft inquiry and a personal credit inquiry. These types of inquiries do not impact your credit score. To understand a soft inquiry, think about all of the pre-approved credit card or auto loan offers that you receive in your mailbox. While you didn’t initiate or request these inquiries into your credit, someone pulled your credit information on behalf of the lender, who then extended the pre-approval notice to you.
As far as the personal credit inquiry, you are able to pull your own credit report at any time you want. In fact, if you anticipate yourself to be in the market for a big-ticket item in the near future, it is a good idea to pull your own credit report, before you even start shopping around for rates.
It is vital to make sure that your credit report is accurate, and that you effectively fix any errors that you may find in your report. Be sure to pay close attention, since a Federal Trade Commission study estimates that as many as 42 million Americans currently have errors listed in their credit report.
So… what does this mean for you?
If you are trying to ride the market and time your purchase or refinance based on how the interest rates are performing, you are trying to fight a losing battle. Historically speaking, it is incredibly uncommon for mortgages rates to be as low as they currently are, and it is crucial to remember that rates can increase without warning at any time.
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If you have ever considered refinancing your home – now is the time to take action.