Are you shopping for the lowest refinance rates from today’s best mortgage lenders and are concerned that too many credit inquiries could damage your credit score? According to the credit bureaus there’s a way to shop smartly for refinance rates without harming your credit score. Here are several tips to help you get the lowest refinance rates from today’s best mortgage lenders while keeping your sanity intact.
Refinance Rate Shopping & Your Credit Score
If you’re considering refinance your mortgage this year and haven’t checked your credit you’re leaving a lot of cash on the table. The only way to get the lowest refinance rates from today’s best mortgage lenders is to have the highest credit score you can manage.
If you’re already shopping for refinance rates and you’re finding the quotes you’re getting are higher than what lenders are advertising the likely culprit is your credit score.
The first thing you should do is visit the government mandated website AnnualCreditReport.com and check your three credit reports for errors. If you find mistakes each credit bureau has an online process for disputing errors and you’ll need to do this before allowing any mortgage lender to pull your credit.
How credit inquires damage your credit score
When a mortgage lender runs your credit they’re making a formal inquiry that stays with you. These inquiries can be found in the scoring category under “new credit.” This scoring category represents 10% of your overall credit score.
Applying for credit cards and loans can damage your credit score because the inquiry is a request to increase your overall debt. The more debt you have the more risk you are for defaulting on your loans. That’s why your credit score goes down when you apply for new credit, including mortgage loans.
How to manage multiple mortgage lender credit inquires
The most important thing you can do when shopping for refinance rates is put any major purchases on hold prior to refinancing. Avoid applying for credit cards or store charge accounts.
The credit bureaus categorize your inquires and some damage your credit score more than others. There are four categories of inquiries that you need to manage.
- Credit Inquires for Mortgage Loans
- Credit Inquires for Car Loans
- Credit Inquires for Credit Cards
- Credit Inquires for Store Charge or Personal Loans
Each of these four inquiry types is weighted differently when it comes to your credit score. Store charge cards for instance have the most negative impact of the four. Next on the bad list are your credit card applications. These have more of a negative impact on your credit score than home and car loans because the balances increase over time.
Never apply for credit cards at the same time you’re shopping for refinance mortgage rates.
How mortgage lender inquires affect your score
Depending on what your credit score is five points might seem like a little or a lot but that’s how much of a hit you’ll take when shopping for refinance rates. Here’s what you need to know to protect your credit.
The credit scoring model used by FICO (Fair, Isaac and Company) ranges from 300 to 850. The largest part of your credit score, 65% to be exact, is based on your payment history and how much you’re using.
The next 15 percent of your credit score comes from your overall credit history. This means the amount of time that you’ve been using credit, the duration of your history. The longer you’ve been using credit responsibly, the higher your score.
The following 10 percent comes from the types of credit you use. This is where car loans and home loans are a positive factor and store charge accounts are viewed as a negative. The last ten percent is the “new credit” category where inquiries are a factor.
Ten percent might not sound like much but that ten percent is 85 points, which could be hundreds of dollars in your mortgage payment. This is why managing your credit inquires is an important part of refinance rate shopping form today’s best mortgage lenders.
Having your mortgage lender run your credit is estimated by financial advisors to cost you 5 points on your credit score. You can limit the impact of shopping from multiple mortgage lenders by managing these inquires correctly.
How to shop today’s best mortgage lenders without dinging your credit
Shopping for the lowest refinance rates means you’re going to have to give up your social security number to get accurate quotes. There’s no way around taking a hit; however, you can minimize the impact by following these refinance rate shopping tips.
You won’t get penalized for refinance rate shopping if you limit credit inquires to a 14-day time period.
As long as your mortgage credit inquires fall into this time period you’ll only get hit for one inquiry. You can shop from as many mortgage lenders as you like as long as you do it within that 2 week period.
During this two week period make sure you’re providing a social security number to get accurate refinance rate quotes. You might be hesitant to provide your ssn to potential lenders; however, if you don’t the quotes you’re getting are either advertised rates or someone’s guess.
Correctly managing your credit score could mean as much as a full percent on your refinance rates which translates to hundreds of dollars on your payments, possibly even avoiding a denial.
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