How does the mortgage application and pre-approval process affect my credit score? Will my score go down when I apply for a home loan?
These are common questions we receive from home buyers, and understandably so. Many people have heard that having too many credit “hits” or requests can lower your score, making it harder to obtain financing in the future.
In most cases, however, the mortgage application and pre-approval process has a minimal effect on a person’s credit score. Below, we will explore the reasons why.
How Mortgage Applications Affect Your Credit Score
Most adults in the U.S. have a credit score. These three-digit numbers are derived from your past financial activity. Specifically, they’re based on your history of borrowing and repaying money through loans, credit cards, etc.
Having a high score can help you qualify for financing, including mortgage loans. Good credit can also help you qualify for a lower interest rate, which could save you a lot of money over time.
A low score, on the other hand, tends to have the opposite effect. It can make it harder to qualify for car loans, mortgages and the like. And you might end up paying a higher interest rate, due to the higher risk associated with your credit situation.
Which begs the question: How does the mortgage application and pre-approval process affect your credit score?
The short answer: In most cases, applying for a home loan only has a minimal and temporary impact on a person’s credit score. That’s because the scoring models like FICO are designed to recognize normal “comparison shopping” and the credit pulls that result from it.
According to a 2019 article on the Experian website (one of the three credit reporting bureaus in the U.S.):
“The credit check required for a mortgage preapproval is identical to the one performed when you apply for a mortgage. This check is considered a hard inquiry … which can temporarily lower your credit score a few points.”
A few points is not a big deal, when you consider that the FICO scoring range covers a broad 550-point range from 300 to 850. The word “temporarily” is also a key part of the above quote.
For a better understanding of how a mortgage application might affect your credit score, let’s talk about what these scores are — and where they come from.
How Pre-Approval Fits Into the Bigger Picture
The pie chart below shows the different factors that can affect your FICO credit score. (That’s the one commonly used by mortgage lenders.)
The “New Credit” section (in light blue) is where mortgage applications would fall. When a borrower applies for a home loan, the lender will check their credit reports and scores. This is called a “hard” inquiry, because it can actually affect your score.
But you’ll notice that “new credit” (including mortgage applications for pre-approval) only accounts for about 10% of your overall FICO credit score. And a few inquiries resulting from ordinary comparison-shopping probably won’t have a major impact on your score. We’re talking about a small portion of the 10% slice shown above.
Let me defer to the folks from myFICO. Here’s what is says on their website, as of January 2020:
“Looking for new credit can equate with higher risk, but most Credit Scores are not affected by multiple inquiries from auto, mortgage or student loan lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact…”Source: MyFICO.com
Under the newest FICO scoring model, consumers can apply for mortgage pre-approval or rate quotes several times within a 45-day window and it’s still treated as one big inquiry. (In most cases.) But some lenders might still be using the older FICO model, which allows for a two-week window of multiple inquiries counting as one pull.
So it might behoove you to do your mortgage shopping within a smaller window of time, to minimize the affect it has on your credit score.
According to Joanne Gaskin, Vice President of scores and analytics at FICO:
“It really shouldn’t be that hard for you to do almost all of your rate shopping within a few days if you’re really aggressive about it – certainly a week, certainly two weeks and absolutely within a month.”Source: U.S. News & World Report
The All-Important Risk Factor
Credit scores are an indicator of risk. That’s their whole purpose. They show lenders how much of a risk you are (or might be), based on your borrowing history and credit usage. “Risk” in this context refers to the lender losing money due to default, or failure to repay. A higher score indicates a higher potential risk to the lender.
Shopping for a mortgage loan — in and of itself — does not suggest risk. It shows that the borrower is being prudent, comparing one loan offer to another in order to spot the best one. Nothing risky there. That’s just good financial sense.
Multiple credit card inquiries, on the other hand, are a different story. If a person applies for a number of cards within a short period, it could send a signal that they’re having financial trouble. Also, you’ll end up with several different inquiries on your credit report, as opposed to the “single inquiry” that results from multiple mortgage applications (mentioned above).
The myFICO websites states: “If you apply for several credit cards within a short period of time, multiple inquiries will appear on your report.” This kind of pattern can harm a person’s credit score.
But the mortgage application and pre-approval process is treated differently, according to the company behind the most popular scoring model. It’s a different scenario entirely.
Here’s the bottom line to all of this:
- Mortgage application and pre-approval can affect your credit score, but the impact is usually minimal.
- When you submit multiple loan applications within a short period of time, the FICO scoring system tends to treat it as one big inquiry.
- Rate comparison shopping is a common consumer behavior, and the creators of these credit models understand that. They’re not out to penalize people for that kind of behavior.
- Shopping around for mortgage offers is the only way to spot the best deal, so we at the Home Buying Institute encourage it.
Disclaimer: This article is based on information provided from various public sources, including the MyFICO.com website. The Home Buying Institute makes no claims or assertions about how the mortgage application and pre-approval process might affect your credit score.
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author