One of the most common questions mortgage originators hear from potential borrowers is how credit inquiries impact their credit scores. By definition, a mortgage inquiry occurs when a consumer applies for a mortgage and can only occur when that person gives their express permission. Why is it important for a borrower to understand the impact that mortgage inquiries have on their credit score while shopping for a loan? Many prospective borrowers rate shop to find the best mortgage for them. Some of these borrowers will need to improve their credit scores to qualify for the best interest rates. It can be difficult enough to achieve the credit score needed for these rates, especially in today’s market. If an inquiry can negatively impact the score, this puts the borrower and mortgage originator in an even tougher spot.
This is why it’s understandable that many consumers are hesitant to authorize more than one credit pull. They fear it will have a negative effect on their score. Prospective homebuyers are even more sensitive to this today, given many lenders’ stricter credit-score standards resulting from the coronavirus-driven economic downturn. Mortgage originators can help their clients better understand credit-scoring models so they can qualify for the best terms and rates.
With FICO scoring models, mortgage inquiries are not considered until they are more than 30 days old, a rule sometimes referred to as the “30-day exclusion.” Take, for example, an applicant whose credit is pulled on July 1 and repulled on July 10. If five new mortgage inquiries have been reported during that time, they will not yet be considered by the score. This holds true across the three major credit bureaus (Equifax, Experian and TransUnion).
This also means, however, that while a mortgage inquiry initially reported on, say, June 5 will not be considered on a July 1 credit report, it will be considered on a July 10 report. An inquiry that is at least 31 days old — old enough to be considered by the score — is one of the most common reasons that borrowers don’t achieve the score improvement they are seeking.
In general, originators know that multiple mortgage inquiries occurring within a short period of time are only counted as a single inquiry. This point, however, is frequently misunderstood. The time period or “shopping window” lasts for 14 to 45 days, depending on the bureau.
Some originators mistakenly believe this time period is 30 days across each of the bureaus. Multiple mortgage inquiries within a 45-day period are counted as a single inquiry for Equifax Beacon 5.0 and TransUnion FICO Classic 04. But for Experian FICO v2, it is only a 14-day period.
Hard inquiries are excluded from scoring once they are a year old. If and when the mortgage industry adopts a current scoring model, it is likely that all bureaus will have a 45-day shopping window, so it will be easier to remember.
Finally, even if a mortgage inquiry is considered by the score, it doesn’t mean the score will be impacted. This seems counterintuitive, but it’s true. Think about it from the perspective of credit-account balances. Just because an account balance increased, it doesn’t mean the consumer’s credit score will change, since the increase has to be significant enough to cause a change.
The same concept can be applied to mortgage inquiries. One additional inquiry may cause a score to change, while in other cases it may take three additional inquiries before there is an impact. The effect is dependent upon the credit bureau, the borrower’s scorecard and other information reported on the credit profile.
By using readily available technology to simulate what the score could be at certain points in the future, originators can factor the nuances associated with prior inquiries into the forecast.
Mortgage inquiries are yet another reason why it is important for originators to consider the passage of time when developing a credit-score improvement plan for their clients. By using readily available technology to simulate what the score could be at certain points in the future, originators can factor the nuances associated with prior inquiries into the forecast. This helps to avoid surprises and make it more likely that the borrower can hit (or even exceed) their target score.
The above information probably provides much more detail than an originator would want to communicate to their client. There are, however, some frequently-asked questions that you can answer the next time you and a borrower discuss any potentially negative credit-score impacts due to mortgage inquiries.
Are all inquiries treated the same?
No. Applications for loans that commonly involve rate shopping, such as mortgages and auto loans, are treated differently. These types of inquiries are not considered by the scoring model for the first 30 days. So, if you find a mortgage within 30 days of starting your search, any inquiries won’t affect your scores. In addition, once the 30-day period ends, your scores will consider multiple mortgage inquiries that fall within a certain period as a single inquiry. This is a 14- or 45-day time frame, depending on the credit bureau. So, if you had one mortgage lender pull your credit last week, allowing another lender to pull it a week later will not be considered as an additional inquiry.
Even if it is treated as a single inquiry, it always has a negative impact, right?
No. Like many things associated with credit scores, there are key boundaries that must be crossed before there is an impact on the score. The specific boundaries associated with inquiries are not revealed to the public, but here’s how it generally works: For a certain group of consumers with a certain credit bureau, zero to two inquiries have no impact on scores, while three to five inquiries deduct five points. So, if you currently have four inquiries and you are in this group, one additional inquiry will have no impact. Note that these boundaries are unique to each credit bureau, while the group you are in varies depending on the other information being reported in your credit history.
When an inquiry has an impact, how many points will be deducted from my score decline?
According to Fair Isaac Corp., the source of the mortgage industry’s standard credit scores, “the impact from applying for credit will vary from person to person based on their unique credit histories. In general, credit inquiries have a small impact on your FICO scores. For most people, one additional credit inquiry will take less than five points off their FICO scores.” This impact, of course, does not occur until the mortgage inquiry becomes more than 30 days old.
Does the inquiry stay on my credit file for a long time?
No. Inquiries are only considered by the credit score for one year and only remain on the credit file for two years.
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There is no need for your clients to fear multiple mortgage inquiries, as long as they apply for credit in moderation. By arming prospective borrowers with this information, you can win more business by helping them qualify for the right loan program. ●