These days, lenders are demanding historically high FICO credit scores from buyers looking to obtain a loan. With lenders Freddie Mac and Fannie Mae, the average they look for to approve a loan is around 760.
You want and need to know what can push your scores up or down if you’re in the position of shopping for a mortgage. Hearsay is that multiple credit inquiries by lenders and others to pull up your national credit bureau reports push your score down. Is this true? Could multiple inquiries do damage enough to prevent you from being approved for purchase of a home?
Since maintaining high FICO scores is so important now, let’s look at the key “rules” that govern how inquiries affect homebuyers and mortgage applicants.
- Accumulating large numbers of inquiries CAN lower your score. The FICO models consider them significant because research has shown that people who seek new credit accounts are more of a risk and more prone to defaults. Statistics show that people with 6 or more inquiries on their credit reports can be up to 8 times more likely to declare bankruptcy than people with no inquiries on their reports.
- Suppose you’re shopping for a home loan or refinancing and 6 lenders pull your credit reports – that doesn’t necessarily mean that you’ll be hit with 6 separate inquiries that will lower your score. The FICO models ignore all mortgage related inquiries during the 30 days prior to computation of the score. And all mortgage inquiries made during the 45 days prior to your loan application count as only one inquiry.
- Most often, a single credit inquiry is not a big deal, as it subtracts less than 5 points off of your score per inquiry. But, negative impacts can be had – especially on people who have thin credit files, such as those without extensive credit histories and young folks who are first time homebuyers and have thin credit files.
- You need to make sure your loan officer for auto loans, etc. properly codes the purpose of the inquiry when they report it to the national credit bureaus so it will be accurately identified in your credit file.
It’s highly advised that mortgage applicants avoid all credit-related shopping (home improvements, furniture, credit cards, etc.) in the weeks before their closing so that a string of inquiries won’t interfere with the home purchase process or delay it.
And last but not least, if you’ve checked your own credit before applying for a mortgage – through www.annualcreditreport.com (where once a year reports are free) or by buying them from Experian, Equifax or TransUnion, you FICO score will not be affected.