Once you decide to buy a home, you need a mortgage approval. That means your lender needs to pull your credit report. Oh no – that means a mortgage inquiry and your credit score is going to drop.
Not necessarily and it shouldn't drop enough to affect your approval – maybe. You need to decide which lender you want to use and it's ok to have more than one mortgage company pull your credit report. However you want to have those inquiries within a short time period – ideally 14 days. Typically credit bureaus treat multiple mortgage inquiries as one inquiry as long as they are within 14 days. A mortgage inquiry may drop your score by about 5 points. That shouldn't make a difference in the total picture.
The reason mortgage inquiries are treated differently is that you will only get one mortgage. If you are applying for credit cards, you may apply for 5 different cards and you could actually open all 5. With a mortgage, you will apply at more than one company but you will only take out one mortgage for your new home.
In the FICO scoring model, 65% of the score is based on your credit payment history and credit utilization. About 15% of the score is based on the credit history – or how long you have had credit. Because of that, you do not want to close your older credit cards. You also want to keep your credit card balances as low as possible.
Once you have been approved for your mortgage, do not shop for additional credit. Your lender will update the credit report before closing. If you have additional inquiries, your lender will need to know if there is any new credit and you will need to explain what the inquiries are for. Any new credit could affect your mortgage approval.
Another reason to be careful is if your lender needs a new credit report, you do not want your score to drop. I have had several buyers that had bought homes that need a short sale approval from the seller's bank. Those sometimes can take 3-4 months (or longer!). If so, your credit report may expire and your lender will need to pull a new credit report. If your score drops, your loan may no longer be approved and you will not be able to close on the new home.
If you aren't sure of something on your credit report or think you may need to apply for some type of new credit (car loan, etc), make sure you talk to your lender first. I have worked with clients that have bought new cars while in the mortgage process, we just need to know what you are going to spend and make sure it doesn't affect your mortgage qualification.
Make sure you ask your lender if you have any questions regarding your credit. Definitely talk to your lender before you apply for or open new accounts! After you close on your home, it won't matter but during your approval process, try to avoid applying for any type of credit.
Leslie Vanderwerf, NMLS ID#335509, Summit Mortgage - Email – Website
