In a marketplace where lenders are requiring record-high FICO credit scores — Freddie Mac and Fannie Mae are averaging about 760 on approved mortgages this year — are you a little fuzzy about what can push your credit scores up or down?
Take “inquiries,” which Fair Isaac Corp., the developer of the score methodology dominant in the mortgage industry, says are among the most misunderstood components of its system.
Do multiple inquiries — requests by lenders and others to pull your credit bureau reports — lower your score? Do you know whether or not a lender is entering the correct code to minimize damage to your score when you’re generating lots of inquiries while shopping for a mortgage?
If you’re 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 scientist, Frederic Huynh, provides the following key rules governing how inquiries affect mortgage applicants and homebuyers:
Starting with the basics: Yes, he says, multiple inquiries can lower your score. The FICO models consider them significant because the research shows that consumers seeking new credit accounts are riskier, because they are more prone to defaults.
Statistically, individuals with six or more credit report inquiries can be up to eight times more likely to declare bankruptcy than people with no inquiries; so they do matter, states Huynh.
But this doesn’t mean that if you’re refinancing or shopping for a home loan and six lenders pull your reports, that your score is going to be lowered by getting hit with six separate inquiries. The FICO models disregards all mortgage-related inquiries during the 30 days immediately preceding the computation of the score.
Further, all mortgage inquiries during the 45 days preceding your loan application only count as a single inquiry. The same buffer zones cover shopping for auto and student loans, but no other forms of credit.
A single inquiry is usually not a big deal and only knocks less than five points off your score per pop. But experts say that despite FICO’s good intentions, bad things can happen on credit inquiries. This is especially true for those with “thin” credit files, such as those without extensive credit histories and young, first-time homebuyers.
Larry Nelson, owner of KCB Information, a credit reporting agency in the mortgage field, says 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, which is a loss of 30 points and put her below the minimum score required for the mortgage.
How could this happen, you may ask, since auto loans are one of the three protected classes of credit where multiple inquiries within a short time period are okay? Unless loan officers properly code the purpose of the inquiry when they report it to the major credit bureaus, an auto loan in this case, it won’t necessarily be identified in credit files that way, Nelson says.
Glitches like this are becoming more and more common and can hurt unwary consumers. He strongly urges mortgage applicants to avoid any and all credit-related shopping, for furniture, home improvements, credit cards, etc… in the weeks before closing.