The term “shopping around” doesn’t just apply to getting the best deals on winter clothes or home appliances. It’s an excellent idea to shop around when finding the right mortgage loan to buy a home. Getting mortgage preapprovals from multiple lenders can help you find the loan that’s right for you, preferably with the lowest interest rate possible. This can pay off big in the future, as a lower interest rate can save you thousands of dollars over the lifetime of a loan.
How Hard Inquiries Affect Your Credit Score
You may be concerned that applying for multiple loans can hurt your credit score. Typically, when lenders pull your credit, it results in a hard inquiry landing on your credit report. A single hard inquiry can ding your credit score, but it shouldn’t take too long for the effects to wear off. But multiple hard inquiries can indicate that you’re desperate for credit, and it can take longer for your credit score to recover. Luckily, shopping around for the best mortgage won’t hurt your credit score too much if you do it correctly.
Give Yourself a Limited Time to Shop Around
When you shop around for a mortgage, it means that multiple lenders pull your credit – there’s no way around it. But if you limit your rate shopping to a short timeframe, you can avoid having several hard inquiries negatively affect your credit score. This is because most credit scoring models group all the hard inquiries of the same type as a single credit inquiry as long as they occur within a limited timeframe.
For the FICO® Score model, that window is 45 days. So, if inquiries from the first lender and the last lender you work with fall within that 45-day period, every credit check can be combined into a single inquiry with a minimal impact to your FICO® Score.
It’s important to remember that shopping around for the best mortgage is probably worth it, even if an inquiry lands on your credit report outside of the designated window. That’s because your credit score can rebound after a relatively short amount of time, while the savings you get from a lower interest rate benefits you for as long as you are paying back the loan.
This Strategy Only Works for Credit Inquiries of the Same Type
Note that this policy only applies for credit inquiries of the same type, whether it’s a mortgage, credit card, auto loan or another type of credit. So, for example, if you apply for a mortgage and a credit card within a short time frame, those credit applications can result in multiple inquiries landing on your credit report.