Everyone knows to shop around for a mortgage, but they may be afraid that doing too much digging can hurt their overall credit score. To help ease these fears, here are a few things to keep in mind while going through the mortgage process:
Know the Difference Between an Inquiry and an Application
Many credit score companies like Equifax carry different weights for specific actions. Approaching a lender to get an idea about your rate counts as an inquiry. Your credit score will likely be pulled, but this will not count as much as submitting a full blown application.
Until you have a better idea of which lender you want to go with, avoid making any sort of mortgage commitment and opt for a “pre-approval” instead. Keep in mind that these numbers are only estimates, and your final terms will be different based on the time you submit an application and “lock in” your rate.
Try to Get All Your Shopping Done at Once
Credit score companies offer consumers a little bit of leeway. They understand the need to shop around. When someone makes an initial request for information on a mortgage or auto loan, they often have a grace period or “window” to make more inquiries without recurring penalties.
Sources vary on how long this window lasts. The general consensus is that it is between 14 and 30 days. Avoid any other credit-related activities during this time as well, such as opening a new charge card. These actions can potentially “interrupt” your grace period and cause other inquiries to count against you.
Get Your Credit in Good Shape Several Months Before You Begin Mortgage Shopping
To make sure that you are not searching high and low for an approval — much less a good loan — take care of your credit score about a year before you intend to start home shopping.
Obtain a copy and make sure there are no mistakes or lingering balances. Deal with any problems you see. You can usually get erroneous claims marked off from your score, but this process takes some time and persistence.
Avoid opening new lines of credit during this time or making any big purchases. Banks will see this as a warning sign that you are not financially stable.
Start Saving Early
A healthy savings account makes more of a difference than a few credit score points. Have enough money on hand to pay for closing costs, a 20 percent down payment and one to two years’ worth of mortgage payments. This much of a buffer will help you find a good mortgage faster, and savings can even sometimes boost your credit score.
Do Not Be Afraid to Shop Around
Even if your inquiries do detract from your score, a point or two deduction is less valuable than preferable mortgage terms. Furthermore, going along with a mortgage that will place you underwater will hurt you more than any small credit deductions.
Be patient and keep an eye out for a mortgage that works in your favor.