While shopping for the best loan terms, you may be tempted to pre-qualify with more than one lender. If so, be careful. Too many pre-qualifications could affect your ability to borrow money.
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| With each application for a loan or credit, your credit report will record another inquiry. A lot of inquiries can hurt your credit score. |
Every time you apply for a credit card or other type of loan, the lender checks your credit history. These checks show up as inquiries on your credit report, which is maintained by the three main credit reporting agencies: Equifax, Experian and Trans Union.
The Elusive FICO Score: To determine your credit worthiness, many lenders rely on their own credit scoring systems or FICO scores, which are numbers tabulated using software by Fair, Isaac & Company Inc. and information in your credit report. The number of credit inquiries affects your FICO score.
There has been increasing pressure on Fair Isaac from consumer groups and the mortgage industry to release information about how its software works, and Fair Isaac recently released the information its scoring models use in calculating a FICO score.
Pre-Qualification Inquiries: Basically, inquiries are an indicator of credit risk. According to Fair Isaac, the more inquiries on a borrower's credit file, the more likely it is that the borrower will not be able pay his or her bills. The problem is that many homebuyers get pre-qualified more than once while shopping for homes, generating multiple inquiries on their credit reports.
These Don't Count: Fortunately, Fair Isaac has a new policy that helps potential homebuyers who rack up credit inquiries while trying to find the best home loan. According to the policy, Fair Isaac's software will ignore all auto- or mortgage-related inquiries that occur within a 30-day period prior to the date the credit score is tabulated.
Credit History: A record of an individual's open and fully repaid debts. A credit history helps a lender to determine whether a potential borrower has a history of repaying debts in a timely manner.
Pre-qualification: The process of determining how much money a prospective homebuyer will be eligible to borrow before he or she applies for a loan.
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For every 14 days prior to this 30-day period, only one inquiry will be counted, no matter how many inquiries were made during a particular two-week period.
The good news is that inquiries have a relatively small impact on a credit score. Late credit payments -- particularly recent ones -- and high debt carry more weight. Nevertheless, there's a possibility that homebuyers who continue to shop for loans over a period of months could ultimately hurt their chances to get a home loan, so it's probably best not to get pre-qualified at every mortgage Web site you visit.
Many mortgage brokers and real estate agents are willing to review your credit report with you and point out any potential problems. If you know or suspect there are lots of inquiries on your credit report, you could also ask your lender how this could affect your credit rating or your ability to borrow.
If you've been turned down for credit, you can also obtain a copy of your credit report from the three agencies. This inquiry is not calculated into your FICO score.
