There is a HUGE misunderstanding among MOST mortgage shoppers that whenever a mortgage lender in New Jersey pulls their credit, the score will drop. Therefore, the borrower decides they have no choice but to shop for a mortgage without the lender seeing their credit at all, or by telling the lender what they believe their scores are.
There are so many untruths spread around when it comes to credit. Most of the problems arise when we listen to our friends and neighbors and judge them to be experts. Be very cautious about giving any ‘ole’ body the “expert” hat. It can be very dangerous. Not only is false information being spun, but the information (story) changes as it moves from one person to the next. Just like any bad rumor. Always get your facts from an expert, not the rumor mill – especially when it affects your finances.
Now, let me kill the fallacy about credit scores bombing merely because another lender pulls your credit.
Not only do credit inquiries make up a very small portion of your credit score, credit bureaus do not judge all credit applications as equal. A mortgage lender pulling your credit is seen quite differently by the bureaus than if Macy’s were to pull your credit.
Credit inquiries can arise from various sources. The following (4) are the most common and will impact your score the most:
- A credit inquiry for a store credit card or consumer loan.
- A credit inquiry for a credit card (e.g., Visa, Mastercard).
- A credit inquiry for an auto loan.
- A credit inquiry for a mortgage loan.
Why does the credit bureau consider a credit inquiry to be (possibly) problematic anyhow?
Because when a consumer applies for credit, it is a clear indication that the consumer is attempting to incur more debt. More debt raises the risk of default. Since a credit score is designed to predict the risk of default, it follows that inquiries would factor into the score.
But the risk of default will vary by the type of credit applied for. Applying for several credit cards is seen as far more risky than applying for several mortgages. And the credit card apps will do far more harm than the mortgage inquiries.
So you know, a mortgage credit inquiry will lower your FICO score by 5 points – at most. So, it’s basically meaningless anyhow. The credit bureaus will not dip your score more than once while you are mortgage shopping. Note the emphasis on “while you are mortgage shopping.” While you are mortgage shopping, several requests for your credit file will count as ONE inquiry for credit scoring purposes.
Why only ONE inquiry count for several mortgage inquiries? The credit bureau knows (and they are usually right) that in the end, you will not get 5 mortgage loans. The system is pretty sophisticated and it knows you are applying for mortgages and that you are probably shopping around. So, you can talk to as many lenders as you want during a 14-day period and it will count as one inquiry. If you are a borrower who just can’t make a decision and you continually apply for weeks, your score will drop.
This same ONE inquiry concept applies for auto loans also. But it does not apply for credit cards. If you apply for 10 credit cards, your credit score will tank.
FICO has these reminders for mortgage shoppers:
- Do your rate shopping for a max period of 14 days so inquiries do not affect your score.
- Don’t be unfair to yourself. Mortgage lenders cannot provide an accurate quote of rates and fees without knowing your credit score. This means getting the score directly from the credit bureau, not the borrower. Only the bureau score can be considered accurate and reliable for what we need to do and commit to.
With the changes in the Good Faith Estimate in January 2010, lenders must access your credit in order to provide a bonafied and reliable Good Faith Estimate. If you only want one lender to pull your credit, then only that lender can provide a “reliable” Good Faith Estimate. That leaves you with a virtually useless shopping experience.
Without credit, I will not provide a Good Faith Estimate at all – same with 99% of loan professionals. Why not? Because under the new guidelines, once I provide that Good Faith Estimate to you, I am bound to honor the rates and fees I quote you – with very few exceptions. It would be unreasonable and foolish to obligate myself to terms when I cannot validate the facts beforehand. You should be leery of anyone giving you a Good Faith Estimate who has not seen your credit.
If you have any questions, call me, or ask another professional mortgage lender in New Jersey. You must tune out the rumor mill when dealing with your mortgage.
Until my next post . . . .
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