What Impact Does Loan Shopping Have On Credit Scores?

Getting an auto, student, or mortgage loan can be a huge source of frustration and confusion. There is a wealth of information about how to get the best rates and pricing, but with this comes lots of misinformation as well.

One huge misconception about mortgage or loan shopping, is that the credit inquiries if done within the inquiry ‘window’ have little impact on scores. from loans generally do not have an impact on credit scores, which implies that third party inquiries won’t impact pricing, or approvals on loans. FICO itself has stated that multiple loan inquires “have little impact on a credit score”, and The New York Times came out with an article stating “Borrowers need not avoid shopping around for the best mortgage deal out of fear that allowing multiple lenders to “pull,” or check, their credit will chip away at their score.”

Unfortunately, this advice could be very far from the truth for many. Unlike soft inquires (which are self credit checks or promotional offers), any authorized credit checks by a third party can cause score damage. Although for some this damage may be “minimal”, any points lost on credit scores are a huge deal when applying for a mortgage or other loan depending on the current score and threshold needed for approval and best pricing. And since every credit report is different, if you lose points on categories like age of credit and payments history, then additionally for inquires you may end up with a much lower score than needed.

For example, someone applying for a mortgage needing a 740 plus for approval or the best pricing, can be in a very bad position. If they hold a 742 Fico score & they lose just 3 points due to hard inquiries from loan applications, and wind up with a 739 score, this could cause them to get a higher rate on a mortgage.  The cost may be hundreds of thousands of dollars more over the life of their loan. The original 742 score could also be just above the threshold for loan approval, causing them to lose out on their dream home altogether. Also, at some score thresholds banks offer better mortgage products that could be no longer in their reach.

So what should you do when trying to get a loan?

Find out from a banker what score threshold is needed for approval and best pricing. Once the initial credit report is pulled by the banker if the score is close to the threshold refrain from having other third party inquiries until you are ready for mortgage application. It is also a good idea to call a credit expert that works with bankers to get score increases for mortgage approval. You want to make sure you are working with a credit expert that is viewing credit from the perspective of mortgage approvals and pricing. Let us know if you need help.