In a marketplace where lenders are demanding record-high FICO credit scores , are you a little fuzzy about what can push your scores up or down?
Do multiple inquiries — requests by lenders and others to pull your national credit bureau reports — knock your score down? Do you know whether your lender is entering the correct code to minimize damage to your score when you’re shopping for a mortgage and generating lots of inquiries? If you’re young or otherwise new to the world of credit, could multiple inquiries do enough damage to prevent you from getting approved for a home purchase?
Given the importance of maintaining high scores, FICO senior scientist Frederic Huynh agreed to run through the key rules governing how inquiries affect home buyers and mortgage applicants.
Start with the basics: Yes, racking up large numbers of inquiries can lower your score. The FICO models consider them significant because extensive behavioral research has shown that “consumers who are seeking new credit accounts are riskier,” more prone to defaults, Huynh said.
“Statistically people with six or more inquiries on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports,” he said. So inquiries do matter.
But this doesn’t mean that if you’re shopping for a home loan or refinancing, and six lenders pull your credit reports, that you’re going to be hit with six separate inquiries and have your score lowered. The FICO models, Huynh said, ignore all mortgage-related inquiries during the 30 days immediately preceding the computation of the score. All mortgage inquiries during the 45 days preceding your loan application count only as a single inquiry. The same buffer zones cover shopping for auto loans and student loans — but no other forms of credit.
In any event, Huynh said, a single inquiry usually is not a big deal, knocking less than 5 points off your score per pop. But experts in the credit-reporting field say that despite FICO’s good intentions, bad things can happen on inquiries. This is especially true for people with thin credit files, such as young, first-time home buyers and others without extensive credit histories.
Larry Nelson, owner of KCB Information Services in Pekin, Ill., a credit reporting agency active in the mortgage field, said a recent applicant lost her pre-approved home loan at closing because five new inquiries for an auto loan suddenly appeared on her credit reports. This deflated her FICO score to 610 — a loss of 30 points — and put her below the minimum score required for the mortgage.
How could this happen, since auto loans are one of the three protected classes of credit where multiple inquiries within a short time period are OK? According to Nelson, unless loan officers properly code the purpose of the inquiry when they report it to the national credit bureaus — an auto loan in this case — it won’t necessarily be identified in credit files that way.
Nelson’s home buyer had double bad luck: None of the inquiries that should have been covered by the 30-day buffer carried the correct purpose identification. Plus Fannie Mae and Freddie Mac have begun requiring lenders to pull a second set of credit reports immediately before closing to ensure that applicants’ FICO scores haven’t changed significantly. In this case, there was a sudden increase in score-injuring inquiries in the bureaus’ files, and the buyer couldn’t close on the loan.
Nelson said glitches like this “are becoming more commonplace” and can hurt unwary consumers. He strongly urged mortgage applicants to avoid all credit-related shopping — for credit cards, furniture, home improvements, you name it — in the weeks before their closing because a string of inquiries can knock the home purchase off track or delay it.
Not all inquiries indicate active credit seeking even though your files are accessed. For example, if you’re checking on your credit before applying for a mortgage or by simply buying them from Equifax, Experian or TransUnion, your FICO score goes untouched.
The United States Government allows for every citizen to obtain a free credit report once per year. AnnualCreditReport.com is the official site to help consumers to obtain their free credit report.
Visit any of the Maronda Homes of Central Florida and Maronda Homes of Treasure Coast model centers to talk with a Home and Finance Specialist to learn more about your credit score and loan pre-qualification guidelines.