Many new home buyers are worried about their credit score during their loan shopping. By default I get a question from them, whether my credit score will get hit every time I get pre-approval from a lender. My simple answer, if its within 30days it will all be counted as one inquiry but after 30 days it will be counted as new inquiry and hits your score again. But I thought it would be good to explain more in detail to get some perspective on this matter.

Hard Inquiries vs Soft Inquiries

I am sure you might have heard about Soft and Hard inquires. Self inquiries, such as ordering a credit report for your own use, don’t affect the credit score. Neither do inquiries from your existing creditors, potential employers, or businesses considering whether or not to solicit you. These are sometimes called “soft inquiries”. The inquiries that may affect your credit score are those by new credit grantors to whom you have given your social security number along with explicit authorization to check your credit. These are “hard inquiries”.

Being said about two types of inquiries, you only need to be concerned about Hard Inquires. While shopping for a loan do multiple inquiries considered separate was our initial question. To get to an answer, let me explain about two credit scoring rules developed by Fair-Isaac, which pioneered the development of credit-scoring models, are designed to protect the scores of borrowers who shop multiple lenders for the best deal.

IGNORE RULE

The “ignore rule” is that “the score ignores mortgage, auto, and student loan inquiries made in the 30 days prior to scoring.” The 30 days includes the day of the score, which is not evident from the wording. It is a good rule but borrowers are not warned about other types of credit that are not ignored. A very important one is credit cards, credit card inquiries are considered separate than loans. Also Mortgage borrowers today face the hazard that the 30-day period can expire while their loan is still being processed. If the lender decides to recheck the borrower’s credit, which some do as a standard practice, the mortgage inquiries that had previously been ignored, will then hit the score.

CONSOLIDATION RULE

The “consolidation rule” is that “the score looks on your credit report for mortgage, auto, and student loan inquiries older than 30 days. If it finds some, it counts those inquiries that fall in a typical shopping period as just one inquiry when determining your score.” The consolidation rule is expressed in such a way that most readers interpret it to mean that mortgage, auto and student loans are consolidated together. That is how I read it originally. In fact, what it means is that all mortgage loans are consolidated, all auto loans are consolidated, and all student loans are consolidated. If you shop for one of each type, they constitute 3 inquiries.

Here is a short video which I came across through my linked-in network which explains whether credit inquiry affects your score. He explains how ignore rule and consolidation rule works together for the benefit of the consumer.



To conclude, borrowers shopping for loan should minimize the number of hard inquiries by ordering their own score, which does not count as an inquiry, providing that score to all the vendors they shop. You tell them that they can check your credit when you are ready to authorize it. This will reduce the number of hard inquiries to one, from the vendor you finally select. And do not seek new credit cards during the period you are shopping for a loan.

Some content courtesy: mtgprofessor.com

About Vijaianand Thirnageswaram

I am a Proud Realtor of Texas, trying to guide and help clients to find their dream home and educate them to buy them for right price. I am also a Candidate for CFP who has more financial knowledge which allows me share and educate clients in any financial decision making process.

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