You shop for clothes, shoes, and airline tickets. You even shop for food and gas. Shopping for your mortgage is essentially the same thing. You want to find the best deal without sacrificing quality. You want to shop around for mortgage rates, but do you know how to protect your credit while mortgage shopping?
The Link Between Credit and Mortgage Rates
Credit scores are the main player in what decides your mortgage rates, along with everything in the mortgage application process. Mortgage rates are affected by your credit score, but they are also affected by your credit history. Your credit history affects how much money you have to put down. According to Money Under 30, your credit score also affects ‘the kinds of mortgages you can be approved for, how much you can borrow, the mortgage rates you’ll pay and even how much you’ll pay for private mortgage insurance.’
To be approved for a loan, you need a minimum credit score of 620. However, the higher above 620, the better the terms you’ll be offered for your mortgage. This means that lenders will up the price of your mortgage for every risk they see on your credit report. This is why having a handle on your credit score is important before you are considering a mortgage and becoming a homeowner.
An Example of Potential Savings
Private mortgage insurance (PMI) companies will take credit history into account when deciding your PMI costs. Money Under 30 explains, “You will pay a rate of .54 percent for a 95 percent loan with ‘30 percent coverage’ – if you have a credit score of 760 or greater. If you have a $200,000 mortgage, this will work out to be $1,080 per year, or $90 per month added to your monthly mortgage payment. But if your credit score is 679 or less, the rate for the same coverage on the same mortgage will be 1.15 percent per year. This will work out to be $2,300, or about $192 per month added to your monthly mortgage payment. That’s more than twice the cost of mortgage insurance with the higher credit score.”
It will save you thousands of dollars if you decide you want to better your credit before you shop for a mortgage. By waiting and building your credit score, you will get better rates and terms and will save thousands in monthly fees.
Another link between the two is the effect shopping for mortgages can have on your credit. When a lender checks your credit, it is reported to the credit bureau as an inquiry. A credit inquiry tells the creditors that you’re considering bringing on a new debt. Inquiries like this are inevitable and necessary when looking for a mortgage, so you can’t avoid the mark it will have on your credit. However, it’s important to know how to shop for your mortgages safely to protect the integrity of your credit score.
How to Protect Credit While Mortgage Shopping
The first thing to note is that you have a 45-day window to shop without it hurting your credit. After your first credit check when mortgage shopping, you get 45 days where you can get multiple credit checks from mortgage lenders. No matter how many checks you get within those 45 days, it will only count as a single inquiry. During this time period, you’re able to get multiple pre-approvals and estimates without it negatively impacting your credit each time. Consumer Finance Protection Bureau says, “The impact on your credit is the same no matter how many lenders you consult, as long as the last credit check is within 45 days of the first credit check.”
Mortgage shopping means you are docked with a hard inquiry on your credit report. A hard inquiry for credit occurs when a lender checks your credit. They do this before deciding to let you borrow money for them or not. A hard inquiry mark will lower your credit score by 5 to 10 points – but less if your credit is outstanding.
Other Options
If you’re not immediately ready for the process of mortgage shopping, don’t engage with a lender. Do your research ahead of time so you can approach all of your target mortgage lenders within a few days. This will lower the risk of multiple hard inquiries on your report.
Another way to protect your credit is by only applying for one kind of credit at a time. For instance: if you are mortgage shopping, don’t try to go apply for a car loan. You don’t want to come off as a desperate borrower. However, that is what multiple inquiries will look like to lenders. By limiting applications and hard inquiries, you’ll show lenders you carefully think through your decisions. The less of a risk you pose to lenders, the more willing they are to give you a loan with better rates.
Knowledge is Power When it Comes to Protecting Your Credit While Mortgage Shopping
Before you begin, make sure you know your credit standing. If it’s not in great shape, you have options. You can’t change past credit mistakes. However, by making some intentional changes in your financial life, you can begin to show that you have moved on to better credit management. You can start by making your payments on time.
It is worth it to wait to shop for mortgages until you have a good credit score. There’s no need to rush into something that will end up costing you more each year.
Credit inquiries occur when you apply for home mortgage loans. So make sure you approach prospective lenders within a short period of time so multiple inquiries will appear as a single one on your credit score.
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Before you take on a mortgage, use our calculator to see what interest rate you might expect to be offered if you applied for a mortgage today.
