It's a fairly well known fact that your credit score is one of the most important factors when you are wanting to obtain a mortgage. Your credit score tells lenders how comfortable and responsible you are with borrowed money. Lenders want to see that you have a record of borrowing money by means of a credit card or smaller loan and that you are capable of paying that loan or credit card payment off.
Credit score is measured numerically on a scale of 300-900 with a higher number being a better credit score. Mortgage lenders will typically look for a credit score of at least 700 to qualify you for a mortgage.
There is often some confusion around how your credit score can be negatively affected aside from the obvious ways like missing payments. People often wonder if mortgage applications or applying to multiple lenders affects your credit score. Does refinancing hurt your credit score? What's the difference between a hard check and soft check when it comes to your credit score?
This article is going to cover some of these background questions that come up if you're wondering about the process for obtaining a mortgage.
Mortgage Applications: Does Applying to Multiple Lenders Affect My Credit Score?
Applying for a mortgage will obviously require your lender to check your credit score to see if they are comfortable lending money to you. Most home buyers will shop around to see which lender might give them the best deal on a minimum down payment, interest rate and the like. With your credit score being partially affected by how often it is checked, this raises the question of whether applying to multiple lenders will negatively affect your credit score.
Generally speaking, having your credit score checked by multiple lenders while shopping for the best mortgage will not negatively affect your credit score. Of course, one of those credit checks will be etched into your credit history, but because multiple requests with the same reasoning fall within a tight time period, credit bureaus recognize them as a single request.
Unless someone is getting into real estate investing, it's unlikely that a home buyer is requesting multiple mortgages at the same time. It makes sense for a credit bureau to consider multiple credit checks within a short period of time to be for a single purchase.
On the other hand, your credit score may be affected negatively by multiple smaller-scale credit checks. A typical example of this might be multiple credit checks related to requests for credit cards. Credit checks related to credit cards can be a red flag to credit bureaus as this is a potential sign of taking on excessive debt. This can have obvious negative implications for your credit score moving forward.
Do Mortgage Pre-Approvals or Refinancing Hurt Your Credit Score?
Another question that comes up related to credit rating is whether mortgage pre-approvals or refinancing have any bearing on your credit score. This gets into something called Hard Credit Checks vs Soft Credit Checks.
When it comes to mortgage pre-approval, it's likely that a soft credit check will be done. A soft credit check is different from a hard credit check in that it's a simple and quick look at what your credit rating is without doing a deep dive into your financial history. This quick look at your credit rating is often all that is needed in order for a lender to determine whether you can be pre-approved for a mortgage.
Refinancing on the other hand, generally requires a hard credit check which includes a deeper dive into your financial history and credit rating. Any time a hard credit check is done, your credit rating takes a small hit.
Additionally, the nature of refinancing is that you are likely in a situation where you are not able to afford to make mortgage payments. If you are refinancing for other reasons (eg. sudden drop in interest rates), be sure to factor the cost of a slightly lower credit rating into your analysis. The reduced mortgage payments and lower interest rates may be appealing for cash flow reasons, but your credit rating taking a hit can have longer term implications that you will want to keep in mind.
Here's a simple calculator to calculate your monthly mortgage payments.
The Impact of Car and Credit Loans on Your Mortgage
Car loans and other credit loans can be an interesting factor as you approach applying for a mortgage. Most mortgage lenders require a credit rating of at least 700. One of the ways of achieving a high credit rating like this is to borrow money and pay it back on time, every time. A credit loan, including credit cards, or a car loan can be an effective way of proving your ability to do this.
On the other hand, credit loans and car loans can be an easy way to eat up your cash flow and inhibit your ability to build up a down payment. On top of that, failure to make a payment on a car loan or credit loan can be detrimental to your credit score. A lender that sees you missing car payments might not be too willing to offer you a mortgage and be at risk for having you miss payments on something much more sizeable.
Setting Yourself Up For Success
The best thing to do is to stay away from being in a rush situation where you need to decide quickly on something as big as a mortgage. Whenever possible, take your time. You can't rush a good credit score. It requires time, perseverance and discipline so make sure you have the big picture in mind.
Don't be afraid to reach out to a professional who will have your best interest in mind. Avoid anyone who wants to quickly sell you a product that will only put money in their own pockets. Do your research and continue to get as educated as you can.