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The True Story Behind Credit Inquiries and Shopping for a Mortgage

Posted by Tim Weisheyer on Jul 21, 2015 1:09:55 PM

You’ve read what we have to say about Dave Ramsey's way of living and gotten your financial house in order, making you ready to begin the great house hunt. But before you dive head first into gathering your top ten list of dream homes, you may want to learn a little more about what you'll be paying for that home. 

You’ve set a budget for your monthly payments, but those payments could vary greatly depending on the interest rate you pay for a loan. And the interest rate you end up paying may vary for a number of reasons, too. 

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For a 30-year loan on $150,000, the monthly payment of interest and principal at 5 percent would be $805. That same loan at a 4 percent rate would be $716 a month. It's kind of amazing to see the difference one little percentage point can make.

The interest rate you pay is largely determined by your credit score, which includes:

  • Your credit payment history

  • The number of credit accounts you hold

  • How much credit you are using

  • Your recent credit history

  • Any debt you have that has been referred to collections, foreclosure, or bankruptcy

The higher your credit score, the lower your interest rate will be. Lending is all about evaluating risk, so those with problems on their credit reports – like late payments or carrying high balances on their credit cards – will end up paying higher interest rates.

Many people believe credit inquires play a role in determining their credit score. And while they can, it depends on the purpose of the inquiry.

There are two types of credit inquiries:

  • Hard credit inquiries – Typically the type of inquiry submitted to obtain a car loan, line of credit at a retail store, or other types of debt. It can also be for something like buying that new smart phone you are making payments for over time.

  • Soft credit inquiries – Those types of inquiries submitted to check on the status of your credit and not for the purpose of obtaining a new loan. This can be for any number of reasons, such as an employer background check or if you were to check your own credit score.

When you're gearing up to start the home buying process, it makes sense to limit the number of department store, bank or other credit cards you are seeking. Hard credit inquiries stay on your credit report for two years, but the impact on your credit score varies among agencies.

Credit inquiries can become a big factor if a lender views the high number of requests as a desperate attempt to obtain more credit, but become less of a factor when a lender considers those requests as shopping for a loan, instead of trying to obtain multiple credit accounts.

The good news is that credit inquiries will generally lower your credit score only slightly. Payment history and the amount of available credit you are using are usually given greater weight when determining your credit score and ultimately the interest rate you will pay for a home loan.

So, if you're shopping for a mortgage, we hope this helps you understand a big part of the home buying process just a little bit more.


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Topics: First Time Home Buyer, Buying a Home, Buying 101, Mortgage 101

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