Having multiple inquiries on your credit report can lower your credit score, but not all credit inquiries are treated equally. By being smart about how you shop for a mortgage, you can mostly avoid the impact of multiple credit inquiries hitting your report.
The whole purpose of a credit score is to quantify the risk that a borrower will not repay a loan based on their past behavior and borrowing habits.
Certain habits tend to correlate with higher risk. Someone who makes frantic attempts to borrow money may be trying to borrow before an upcoming job loss, or to repay a debt that doesn't appear on their credit report. Thus, credit scoring models take this into consideration by giving lower scores to people who have more credit inquiries.
When it comes to mortgages, though, the data says that customers who have more inquiries are not necessarily higher risks. In fact, the creator of the FICO score, Fair Isaac Corporation, states on its website that "research has indicated that FICO Scores are more predictive when they treat loans that commonly involve rate-shopping, such as mortgage, auto and student loans, in a different way."
In other words, credit scores are more useful for predicting the riskiness of a borrower when they don't punish people for shopping around for interest rates. That doesn't mean you get a free pass to spend two years rate shopping 500 different lenders, though.
FICO scores have two safety nets built in to protect you from inquiries dinging your score.
- FICO scoring models do not consider inquiries in the most recent 30-day period. Thus, if you visit one lender on a Monday, your score may fluctuate by the time you visit another lender on Thursday, but not because of Monday's inquiry.
- Rate shopping inquiries that are older than 30 days are generally counted as one inquiry for the purposes of calculating your score. Older models grouped inquiries that appeared within a 14-day period, while newer scoring models group inquiries made within a 45-day period.
So, what's all this mean for you?
Basically, the best way to reduce the impact of mortgage-related inquiries on your credit report is to complete your rate shopping within a 45-day period. But even then, you probably don't need to count it down to the day.
Lenders understand that a mortgage is a really big deal, and a quarter-point difference in rates can add up to thousands of dollars over the life of the loan. You can bet that the loan officer would shop around to save a quarter point, too.