Q: I’m shopping for a mortgage and wondering if I’m going about it the right way. What happens when a mortgage lender checks my credit score? And how do I find the perfect lender?
A: Your mortgage may be the biggest loan of your life. Therefore, it’s important that you do your homework well and carefully research any potential lender. However, as you note, shopping for a mortgage lender generally involves a check on your credit. Let’s take a closer look at the mortgage-shopping process, how a credit check affects your score and some tips for choosing the lender that’s right for you.
Credit score 101
First, let’s brush up on credit scores and why they matter.
Your credit score is a three-digit number that serves as an indicator of your creditworthiness and financial responsibility. Your credit score can be anywhere from a “poor” 300 to an “excellent” 850. The score is calculated through a variety of factors, including your credit utilization, payment history, outstanding debt, types of credit and history of credit. The higher your score, the easier time you’ll have getting approved for a mortgage, and the lower the interest rates you’ll be offered.
What is a credit check?
When you apply for a mortgage, the lender will typically pull your credit report from one or more of the three major credit bureaus: Equifax, Experian and TransUnion. This is known as a credit check. The lender will use the information on your credit report to determine your creditworthiness and whether or not you are a good candidate for a mortgage.
During the credit check, the lender will review your credit report and look for any red flags that may indicate that you are not financially capable of carrying a mortgage. This may include factors like missed payments, high levels of debt or a history of bankruptcy. If the lender determines that you are not a good candidate for a mortgage based on your credit report and review, they may deny your application or offer you less favorable terms.
How does a credit check impact my credit score?
When a lender pulls your credit report, it can have a temporary negative effect on your credit score. This happens because each credit inquiry is recorded on your credit report, and can be seen as a red flag by lenders. The good news is, the impact is usually small and temporary, and your credit score should bounce back within a few months.
The impact on your credit score will depend on a variety of factors, including the number of credit inquiries, the types of credit inquiries and your overall credit history. If you have a long and established credit history with a good payment history, a single credit inquiry may have little to no impact on your credit score. On the other hand, if you have a short credit history with missed payments or high levels of debt, a single credit inquiry may have a larger impact on your credit score.
Should I limit my mortgage applications to mitigate the effect on my credit score?
Actually, you can shop around for a mortgage without any additional impact on your credit score, as long as you are mindful of the passing time. All credit checks from mortgage lenders within a 45-day window will be recorded as a single inquiry on your credit report. Creditors know you are only going to buy one home, so the multiple inquiries do not indicate multiple loan applications. You can take your time shopping for a mortgage and getting loan estimates from various lenders. Just be careful to do all your research within the 45-day window.
How can I improve my chances of getting approved for a mortgage?
It’s best to work on boosting your credit score before you start shopping for a mortgage. Here are some tips for bringing up your score:
- Pay your bills on time and in full
- Keep your credit card balances low
- Avoid opening many new credit cards
- Check your credit report regularly and dispute any errors
How do I find the mortgage lender that’s right for me?
When researching potential lenders, you can start by asking family and friends who’ve recently taken out a mortgage for lender recommendations. Look up online ratings and reviews of potential lenders as well. As you check out various lenders, look for those that offer excellent customer service, reasonable closing costs and fees, transparency about the loan process and, of course, favorable loan rates.
Shopping for a mortgage will have a temporary impact on your credit score, but it’s a necessary step in the home-buying process. Use the tips outlined here to find the mortgage lender that’s right for you and to learn what happens when they check your credit score.
If you’re ready to apply for a home loan, stop by Advantage One Credit Union today. We’re completely committed to your financial success.
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