How Does a Mortgage Affect Your Credit Score?

What is a credit score, and why does a higher score mean more favorable rates?

If you took your entire relationship with debt and boiled it down to a number between 300 and 850, you’d have your credit score. Equifax, TransUnion, and Experian are the three major credit bureaus, but they all use similar criteria to create a credit score. Your FICO score, created by Equifax, is most lenders’ preferred credit score, but all of these scores may be considered when evaluating creditworthiness. When generating your score, credit bureaus weigh payment history, debt volume, the age of your credit, credit diversity (installment based debt like a car loan and revolving debt like credit cards), and credit inquiries. So if you’re monitoring your credit, paying on time, and using less than 30% of your total credit, you should be well on your way to a high score.

Lenders then use that score as a guide to offer interest rates and terms for each borrower. If you think of a loan as a bet, the credit score is the odds of the lender being paid back in full. Rather than denying a mortgage application, lenders adjust the rates and terms to make sure their bet is safe. If a borrower has a high credit score, they can offer more favorable rates and terms because it’s a relatively safe investment. If a borrower has a fair to good credit score, lenders may raise the rates they offer by fractions of a percentage as a way to hedge against a possible default.

Basically, your credit score helps lenders evaluate your ability to pay back your loans, based on your borrowing history. The higher your credit score, the better rates you’ll be able to get, which can lead to significant savings over the life of your mortgage. Your credit score also affects your pricing for mortgage insurance, which is required if you make a down payment less than 20%.

For example: Take a homebuyer with a 20% down payment applying for a 30-year-fixed loan to purchase a $200,000 home in New Jersey.

This scenario is for illustrative purposes only. C

This scenario is for illustrative purposes only. Calculations are based on a $200,000 single-family primary residence home in Hudson County, NJ using Better Mortgage’s rate tool.

The difference in credit score alone could cost $36,720 over the life of the loan.

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Does getting preapproved hurt your credit?

Whether getting preapproved hurts your credit score depends on what you're getting preapproved for. Preapproval for car loans and mortgages typically involves a hard credit inquiry, which will lower your credit score a bit. Prequalification for car loans and mortgages usually use a soft credit pull, which doesn't affect your score. Preapproved credit card offers do not affect your credit score.

What Rate Shopping Means for Your Credit

Many credit scoring calculations are forgiving when it comes to borrowers who are rate shopping—they don’t treat all inquiries the same. In fact, mortgage, auto, and student loan inquiries receive special treatment because credit scorers realize that you are looking for the best rate—not trying to apply for several mortgages, auto, or student loans. The exact impact of multiple loan inquiries all depends on the credit scoring model that’s used.

First, inquiries from these types of lenders don't affect your credit score for the first 30 days after they are made. Your credit score won't drop because of the loan application and it won't make it harder for you to get approved.

So how many times can you pull credit for a mortgage without it impacting your credit score?

Credit scoring models determine the window of time where multiple credit inquiries for a mortgage count as only a single inquiry.

There are two main credit scoring models, FICO and VantageScore, and different lenders choose whatever model they prefer.

Newer versions of FICO score offer homebuyers a 45-day window for rate shopping. Whereas older versions of FICO and VantageScore 3.0 narrow that period of time to only 14 days.

So it’s important to speak with your lender about the credit scoring model they’re using.

But if you’ve yet to decide on a mortgage lender, it may be best to take a conservative approach and keep rate shopping to two weeks, rather than 45 days.

You can check your own credit with no impact on your score

When you check your own credit — whether you're getting a credit report or a credit score — it's handled differently by the credit reporting agencies and does not affect your credit score. If you are applying for a mortgage and haven't already checked your credit report for errors, do so now. You can get a free copy of your credit report at www.annualcreditreport.com . If you find any errors, get them corrected as soon as possible.

How do multiple credit checks work?

The good news is that if you are shopping around with different lenders, credit bureaus will typically only dock your score once within a 45 day period, no matter how many mortgage lenders do a hard credit check. That’s great if you think you’ll close on a mortgage within 45 days, but if you’re early on in your homebuying process, the clock will start ticking earlier than you may want. Luckily, a Better Mortgage pre-approval doesn’t require a hard credit pull.

You can start your home search with your pre-approved amount, then shop multiple lenders for rates when you’re ready to buy. And if you decide to finance your home with Better Mortgage (great choice!), we’ll only perform a hard credit check once, even if you were pre-approved months before.

This is a great “have your cake and eat it too” strategy when it comes to house hunting. A pre-approval means you’ll start your house hunt with useful information like a budget to work with and a pre-approval letter to show sellers you’re serious. And by waiting until you’re ready to buy to compare mortgages with different lenders, you won’t impact your credit score with a hard credit inquiry or prematurely trigger the 45 day ‘mortgage shopping’ window.

Make Payments On Time

How do you bring your score back up to its pre-mortgage level? By making on-time payments every time. Don’t sign up for those services that say they can raise your credit score fast. Simply make your mortgage payments—and all other payments, for that matter—on time. As you prove that you’re a responsible borrower, your score will naturally rise.

Pay your bills on time and in full. If your busy lifestyle sometimes forces bill-paying lower on your priority list, set up an automatic payment through your bank so you never forget.

35% Percentage of your score that is payment history, according to FICO.

What If Your Credit Score Goes Down Before Applying for a Mortgage?

  • It’s possible to be negatively impacted by a credit inquiry such as a mortgage application
  • It can push you below a key credit scoring threshold, such as from 625 to 619
  • This could make you ineligible for a home loan or increase your interest rate
  • In this case you could ask for an exception or take action to boost your scores

There are cases where a credit score just a few points lower could actually result in a higher mortgage rate, or completely jeopardize your loan application.

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For example, a 620 FICO score is the general cutoff for Fannie Mae- and Freddie Mac-backed mortgages.

If for some reason one of your scores dropped from 625 to 619 just as you applied, you could be out of luck.

Assuming you find yourself right below a certain credit scoring threshold, you may be able to use an older credit report if all the information is the same other than the mortgage inquiries.

Or you can ask for an exception from the lender if there’s a clear and compelling reason.

After all, it wouldn’t be fair to penalize you simply for shopping around for the lowest mortgage rate, now would it?

Alternatively, you could take a few quick actions to boost your scores, such as paying off some debt to reduce your credit utilization.

Then look into a rapid rescore. Your loan officer or mortgage broker should have skills in this department to help.

Mortgages Can Improve Your Credit

The calculation of your credit score is a bit of a mystery. FICO publishes general guidelines to help consumers understand their score, but nobody knows the specifics of the calculation. However, the types of loans you have do play a role in your score.

If your credit report contains nothing but a bunch of credit card loans, your score won’t be as high. This mix of revolving debt to installment debt (your mortgage) accounts for about 10% of your score. 

If you pay a credit card a little late, the effect on your score won’t be massive. If you don’t pay your mortgage on time, expect your credit score to reflect that. If it happens, make the payment as quickly as possible. If it’s a little late, your mortgage company may not report it to the credit bureaus.

Types Of Credit Inquiries

There are two types of credit inquiries when it comes to your credit score: hard and soft. Here’s the details on both.

Hard Inquiries

When you apply for a mortgage, car loan, student loan, credit card or personal loan, lenders will check your credit. This is a hard inquiry and will cause your score to drop slightly, but only temporarily.

If you apply for the same type of credit for big ticket items several times in a short period of time – such as shopping around for a car loan or mortgage over a week – each lender’s hard inquiry will be counted as one, minimizing the damage to your credit score.

Soft Inquiries

A soft inquiry happens when someone checks your credit when you don’t submit an application for a new credit card or loan. These inquiries don’t cause your credit score to rise or fall. When you check your own credit, for instance, this is a soft inquiry, and doesn’t impact your credit score.

If someone else checks your credit, that is also a soft inquiry that won’t hurt your credit score. A few examples of this could are a utility company looking at your payment history, an employer running a background check or a creditor considering upping your credit limit.

How many times mortgage lenders check your credit history

Many borrowers wonder how many times their credit will be pulled when applying for a home loan.

While the number of credit checks for a mortgage can vary depending on the situation, most lenders will check your credit up to three times during the application process.

1. Initial credit check for preapproval

When homebuyers are ready to begin making offers on potential real estate, many of them get preapproved for a home loan.

Mortgage preapproval is a rigorous process where lenders verify the details on your loan application including:

  • Your income and employment
  • Account balances
  • Confirmation of any foreclosures or bankruptcies
  • Debt-to-income ratio
  • The source of your down payment

Loan preapproval is also when a mortgage lender pulls a copy of your credit report to evaluate your credit history.

This initial credit pull to become preapproved for a home loan is the first of potentially three hard credit inquiries during your loan application.

Some homebuyers confuse preapproval with prequalification.

Mortgage prequlaification is more of a general status where mortgage lenders gather self-reported details such as your marital status, social security number, debt payments, and other personal finance information to give you an idea of how much you can borrow.

2. Sometimes a credit inquiry during the mortgage application process

A hard pull on your credit report during the home loan application is not standard. But when a lot of time passes between being prepproved and closing on a home, then mortgage lenders may pull a second copy of your credit report.

Credit reports are typically only valid for 120 days. So if yours has expired, then the lender will re-pull your credit.

Also, if you’ve paid down debts, contested errors, and removed disputes from your credit history — then an additional hard pull could reveal a higher credit score, which, in turn, could lower the interest rate on your home loan.

3. Final credit check before closing

Because a lot of time can pass between the initial credit report and a closing date, your mortgage lender will take a final look at your credit before closing on your home loan.

Lenders use this final credit check to look for any new credit inquiries and determine whether or not those inquiries resulted in new debt or lines of credit, like a new credit card.

New debt can affect your debt-to-income ratio, so do your best to refrain from any type of financial activity that could negatively impact your home loan terms.

This final credit check before closing is a soft pull. Unlike a hard pull, a soft pull won’t impact your credit score.

Your mortgage lender wants to make sure that both credit reports match, and if they don’t, you may need to provide additional documentation or send your loan application through underwriting a second time.

Let’s Talk FHA Loans

  If apartment living is getting old, or you’ve outgrown your parents’ basement and house rules, you may be thinking about buying your own place. For this reason, you may be interested in learning about home loans that offer low and no-down payment options and have flexible lending requirements. One of these is the FHA loan. Let’s take a closer look. 

  • Amerifirst Home Mortgage

  • 5 min read

  • Tue, Mar 29, 2022

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