Shopping for a Mortgage? Don't Make This Mistake

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  • If you need a mortgage, it's a good idea to shop around for rate offers.
  • It's also smart to do your rate shopping within a short period of time.

It could end up costing you indirectly.

These days, mortgages are getting increasingly expensive. And so if you'll be financing a home purchase, it's important to shop around for the best mortgage rate. That could mean making multiple phone calls to different mortgage lenders and discussing your financial situation.

But if you're going to rate-shop, it's important to do so within a short period of time. If you drag out the process, it could actually end up hurting your credit score.

The problem with taking your time

When shopping for a mortgage, it's important to get as much information as you can. After all, you're borrowing what's likely a large sum of money, and you want to make sure to snag as competitive an interest rate on your home loan as you can.

But if you're going to rate-shop, it's best to do so within a single 14-day period if possible. Doing so will reduce the chances of you ending up with multiple hard inquiries on your credit report.

Whenever you apply to borrow money, a lender performs a hard inquiry on your credit report to make sure you're a trustworthy borrower. A single hard inquiry is generally not a big deal, as it will usually only result in a five- to 10-point drop in your credit score. It's when you have multiple hard inquiries on your credit report that you could start to run into trouble with credit score damage.

Now the good thing about shopping around for a mortgage is that if you do so quickly, you won't have a whole bunch of different hard inquiries on your credit report. Rather, all of those inquiries will count as one.

Why so? If you're shopping around for a mortgage and seven different mortgage lenders pull your credit report within a short period of time, it's pretty clear that you're only looking to borrow a single sum of money. And so those various inquiries for the same purpose will all get lobbed into one. But if you spread those inquiries out beyond 14 days, that may not happen. Instead, those various inquiries might get counted individually.

Note that a single hard inquiry could cause a five- to 10-point drop in your credit score. Well, four or five hard inquiries could cause a 25- to 45-point drop. That's more significant. That could take you from having excellent or great credit to having a score that's still pretty good, but not eligible for the best rates a given lender is offering. And so you're better off doing your rate shopping quickly to avoid that fate.

Rates can change

Another reason it pays to rate-shop for a mortgage quickly? Mortgage rates can fluctuate from day to day and, in some cases, rise sharply in a matter of weeks. And so if you want a true apples-to-apples comparison, it's best to gather rate quotes from different lenders within a short timespan. That way, you'll know what rates you're looking at -- and you'll put yourself in a better position to choose the right lender for your borrowing needs.

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