Credit Myths Exposed: Multiple Mortgage Credit Inquiries
Updated: Jun 26, 2018
You've all had them... Borrowers shopping for a Mortgage loan, who have decided to give you a shot at closing their loan. You've got the chance to seal the deal, & close your month strong. But a common roadblock is encountered by Mortgage Professionals when they are the 2nd, 3rd, or even 4th choice of someone "shopping" for a loan; The client is concerned & sometimes even adament, that one more "pull of their credit", will drop their score like a rock... An uneasiness fills the room, as you too are worried it will harm their FICO & result in "hits" in your Guidelines. Or worse yet, the extra inquiry will lower their score to the next tier & raise their interest rate. A higher rate means you lose your competitive edge. I want to share a little known secret I learned & utilized in my years when I was a Mortgage Professional. I still use this secret today as a Senior Credit Repair Specialist. The 3 bureaus say it plainly - Borrower scores will not drop when a mortgage lender pulls their credit more than once.
Credit Inquiries: They are not weighted equally
The truth on how inquiries really affect credit
A "credit inquiry" is a formal request to review a person's credit report. They are just one small element within a larger credit-scoring category known as "New Credit". New Credit accounts for 10% a person's overall credit score. Searching for new credit is relevant to a clients credit score because when one makes a credit inquiry, it's a specific request to increase their level of indebtedness. Taking on additional levels of debt increases the probability of a default. This is why credit scores drop when Clients go looking for new credit cards or charge cards -- each new credit inquiry increases the probability of them taking on large amounts of debt, which makes it less likely that they'll make good on their payments to creditors. Credit inquiries come in many varieties.
A credit check for a mortgage loan
A credit check for an auto loan
A credit check for a credit card application
A credit check for a store credit card, or consumer loan
Not surprisingly, each of these 4 credit check-types receive different treatment by the bureaus. For example, a credit card application carries more weight than a mortgage loan and can cripple a credit score. This is because credit card debts tend to move higher over time, which weakens overall credit position. Mortgage debt, by contrast, eventually pays down to $0
A Mortgage Inquiry Lowers a Clients FICO by 3-5 Points
Say this to Borrowers with confidence
The effect of a mortgage inquiry on a credit score remains tiny. Here's why: Mortgage lenders evaluate credit using the FICO scoring model. The FICO scoring model ranks scores from 300-850. 65% of that score is linked to two elements of your credit history -- (1) Payment History, and (2) Credit Utilization. The credit bureaus give the most weight to how much money they're borrowing from creditors, and whether they are actually paying the creditors back. That makes sense. The next 15% of the credit score is tied to credit history; to the length of time they've had credit in their name. The more time spent managing ones own credit, the better their score will be. This, too, makes sense. It's risky to lend to a "first-timer"; a person who has never had a credit card to his name, or repaid a car loan, or borrowed money for an education. Then, the next 10% is linked to the type of credit that is maintained. Auto loans and mortgage debt are viewed as positives in this regard. Store charge cards are viewed as a negative. These positives and negatives are based on default rates from tens of millions of other borrowers. A mortgage credit inquiry is estimated to lower a credit score by just 3-5 points
Shop Multiple Lenders, Get One "Ding" On Your Credit Report
The fact of the matter
When shopping for lenders and taking on credit inquiries, it will initially lower your Clients score. However, what I wish to impart to you through today's Article is this: The important concept is that -- unlike applying for multiple credit cards -- when someone applies for multiple mortgages, they won't get "dinged" for multiple, consumer-initiated inquiries. This is because when they apply for 5 credit cards, they'll likely get the option to use them all five. By contrast, with the mortgage applications, they'll only get an approval once. As such, the credit bureaus have made it formal policy to permit "rate shopping". In fact, it's encouraged. And this leads us to the second important FICO-protecting concept. Borrowers have the right to shop with as many lenders as they like. The secret though, is for a client to sort out their shopping for a mortgage within a limited, 14-day time frame. If the inquiries are properly managed, the credit bureaus will acknowledge the first credit pull as a "ding", but will ignore each subsequent check. This means that your Client can have their credit checked by an unlimited number of lenders within a 2-week period, enabling you to also pull their credit & know your pricing will not be affected. So.........no matter how many credit checks your Clients do, the mortgage inquiries will always get lumped into a single credit score "hit".
This is The Credit Cowboy & I am out.....