How Does a Mortgage Application Affect My Credit Score?

To date, the largest investment you may have ever made could have been buying a car. Buying a home is even more significant, and most people don’t have cash on hand for it. That’s where mortgages come in, as most homebuyers work with a bank or mortgage lender to borrow money to buy their home.

As a first-time homebuyer, you probably already know that your personal credit is important for getting mortgage applications approved. What you may not know is that simply submitting an application can impact your credit score.

The good news? The effects are generally modest, and borrowers often come out better on the other side. Once you secure your mortgage—as long as you make all of your payments—it’s one of the best ways to increase your credit score in the long term.

Here, we answer frequently asked questions about how mortgage applications affect your credit score.

What Is the Difference Between a Soft Credit Inquiry and a Hard Credit Inquiry?

Are you facing a hard or soft credit inquiry? Navigate the distinction between the two. (Hint: Only one type affects your credit score!)

Soft Credit Inquiry

Soft inquiries are conducted by lenders assessing eligibility for prequalification offers, employers conducting background checks, and individuals checking their own credit reports.

It’s important to know that soft inquiries will:

• Not affect your credit score
• Not require your permission
• Provide high-level details, such as credit score, address, and flags
• Not be visible to creditors on the credit report

Hard Credit Inquiry

Hard credit inquiries are run by lenders before offering a loan, whether it’s for a mortgage, vehicle purchase, school tuition, or credit card. 

Hard credit inquiries have ramifications and will:

• Impact your credit score
• Require your permission
• Provide a deep dive into your credit history

Why Can Mortgage Applications Impact Someone’s Credit Score?

Are you a trustworthy borrower? When you apply for a loan, your lender does a hard credit inquiry to determine your willingness and ability to pay back debt. 

Lenders understand the red flags to watch for along the way, and if too many credit checks are run in a short period, it could spell trouble. This means you’ve likely sought loans from too many organizations and have been turned away—signaling potential financial instability. If you appear to be high risk, your credit score will drop.

How Much Should I Expect My Score to Drop When I Apply for a Home Loan?

Contrary to popular belief, applying for a home loan doesn’t cause a significant drop in your credit score. At most, you may see a manageable difference of less than five points. Although the credit inquiry stays on your credit report for 24 months, it only affects your credit score for one year.

The Credit Impact of Applying for Multiple Home Loans

Will my credit score drop each time? Although it’s not the best idea to apply for multiple types of loans at once, comparing interest rates and terms between mortgage providers should not lower your credit score. The algorithms for calculating credit scores recognize when individuals are filing mortgage applications and adjust accordingly.

What Is a “Shopping Window” for Home Loan Applications?

Every borrower gets a “shopping window,” during which they can compare mortgage offerings from different lenders. Completing your mortgage applications during this time decreases the impact of hard inquiries on your credit score because it counts all checks as a single event.

The Length of the Shopping Window

The shopping window varies by analytics provider. For example, VantageScore has a 14-day window, whereas FICO is 14-45 days, depending on the FICO scoring formula the lender chooses to use.

How Can You Minimize the Impact Mortgage Applications Have on Credit Scores?

Applying for a mortgage doesn’t have a huge negative impact on your credit score. However, if you’re concerned, there are a few things you can do to keep your numbers up.

Prequalification

Unlike a loan pre-approval, prequalification only requires a soft inquiry that doesn’t affect your credit score. Only if the sale proceeds will the lender dig deeper into your credit with a hard inquiry that may impact your score.

Debt Reduction

To make your application as attractive as possible, pay down your existing debt before applying for a home loan. In addition to proving to lenders that you can afford a monthly mortgage payment, unused available credit looks better than almost-maxed-out lines.

Timing

Financial stability shows mortgage lenders that you are willing and able to pay back a loan. Wait 3-6 months after any major financial change—applying for credit cards or car loans, signing financial contracts, and even starting a new job—before submitting any mortgage applications.

Take the Next Step in Your Homebuying Journey

Applying for a mortgage doesn’t zap your credit score like most people think. Your score may temporarily drop a few points, but with time, a mortgage will actually increase your credit score.

Ready to learn more about applying for a home loan? The specialists at FFB Mortgage Lenders are always available to help. Contact us or apply now, and let’s get started today!