Despite a volatile housing market, many people still dream of becoming a homeowner. According to a recent survey, about 28 million Americans — approximately 11% of the population — plan to buy a home in 2023.
The majority of homebuyers purchase homes with a mortgage. If you need to take out a loan to buy a house, you may be wondering, “Does applying for a mortgage affect your credit score?” The answer is yes — but it can also help your credit over time.
Here’s what you need to know about the impact of shopping for a mortgage on your credit.
Types Of Credit Inquiries
When you’re shopping for credit, such as a personal loan, car loan, credit card, or mortgage, the lender will check your credit. There are two forms of credit checks: hard inquiries and soft inquiries.
Understanding the difference between hard and soft credit checks — and when they occur — is important to protect your credit.
Hard Credit Inquiry
A hard credit inquiry occurs when a creditor takes an in-depth look at your credit report. The lender will perform a hard credit inquiry only after you have submitted an application for a new form of credit and given your consent to a hard credit check.
Every hard inquiry can damage your credit. According to myFICO, the company behind the FICO credit score, credit inquiries cause credit scores to drop by as many as five points.
Soft Credit Inquiry
Soft credit inquiries don’t utilize the full credit report. Instead, a lender looks at a brief snapshot of your credit history. A lender may perform a soft credit inquiry when you want to view potential loan options or check your loan eligibility.
Soft credit inquiries have no impact on your credit score.
Mortgage Pre-qualification vs. Pre-approval
When you begin the home-buying process, you will hear two terms: mortgage pre-qualification and mortgage pre-approval. While they may sound the same, they refer to very different processes.
Pre-qualification
A mortgage pre-qualification gives you an idea of how much you can borrow. You can pre-qualify online by answering a few basic questions, and the lender will perform a soft credit check.
A pre-qualification gives you a ballpark idea of what you can afford, but it’s not a binding loan offer.
Pre-approval
A mortgage pre-approval is more detailed than a pre-qualification. To get a mortgage pre-approval, you have to provide documentation of your income and assets. The lender does an in-depth review of your credit history and performs a hard credit inquiry, which can cause your score to drop by a few points.
A mortgage pre-approval is a stronger commitment from the lender and tells you what you can borrow to purchase a home.
Mortgage Credit Pull Window
When you’re shopping for a mortgage — or any type of loan — it pays to limit your shopping to a specific window of time. If you confine your credit inquiries to a certain window, the credit bureaus count them as a single inquiry. The window varies based on the credit scoring model but ranges from 14 to 45 days.
According to the Consumer Financial Protection Bureau, multiple credit checks from mortgage lenders are recorded as a single credit check if they occur within a 45-day window.
How A Mortgage Can Improve Your Credit
How does applying for a mortgage affect your credit score? New credit inquiries can negatively impact your credit. But over time, a mortgage can improve your credit score in the following ways:
- Credit mix: Your credit mix is the different forms of credit you manage, such as revolving credit cards or installment loans. Adding a mortgage to your credit report improves your credit mix and can cause your score to increase.
- Payment history: Your history of making payments on time is the biggest factor determining your score. Making your mortgage payments on time every month will improve your credit.
- Length of credit history: Most people opt for 15- or 30-year mortgages. The length of your credit history and the age of your credit accounts affect your credit, so having an account for several decades can help boost your credit.
How A Mortgage Can Hurt Your Credit
A mortgage can hurt your credit in the following ways:
- New credit: Taking out multiple forms of new credit makes lenders nervous, so opening a new credit account — such as a mortgage — can damage your credit score.
- Payment history: If you miss a payment, you can cause significant damage to your credit. And if you fall behind and the bank forecloses on your house, the foreclosure will stay on your credit report for seven years.
How Your Credit Score Relates To Your Student Loan Debt
Many people put off shopping for a mortgage if they have student loans because they’re worried they won’t qualify for a loan or that it will damage their credit. However, buying a home with student loan debt is possible if you have good credit and keep your debt-to-income ratio low.
Student loan refinancing is one way to lower your monthly payments and improve your debt-to-income ratio so you’re more likely to qualify for a mortgage. You can qualify for a lower interest rate or a longer loan term to reduce your payments, which is free.
If you plan on refinancing, make sure you refinance your debt a few months before you begin mortgage shopping. That way, your credit can recover from the dips it may experience from credit inquiries when you refinance your debt.
You can check your rates — with a soft credit inquiry — through ELFI.