Nate was looking to purchase his very first home sometime within the next six months. He contacted a realtor who told him to go to a lender to get pre-approved for a mortgage.  This is a common practice, but there is a BIG PROBLEM and it is one that could easily cost you lots of money. For Nate, it cost him almost two thousand dollars because he went beyond the 90- days and he was at 719, costing him lots of money. It can easily happen to any homebuyer.

The first step most realtors and lenders tell you to do is get preapproved for a mortgage. Let’s walk through some rules about your credit scores when you get prequalified for a mortgage. There are several rules here, but I am going to walk it through for you.

1. You have 14 Days to shop a mortgage.
2. The impact from the first credit report is about 7 points.
3. Mortgage lenders grade FICO Scores by 20 point increments.
4. A hard (credit application) inquiry does not impact scores until the following month.
5. Hard inquiries impact your FICO Scores for 12 months
6. Your lender’s credit report / scores are good for 90 days.

You have 14 days to shop a mortgage

Inquiries from any lender while applying for credit will lower your lender’s FICO credit scores. For mortgages, you have 14 days to shop multiple lenders. This means you can contact two, five, and maybe ten lenders. As long as they pull your credit report within that 14 day period form the first to the last, it only counts as one hard inquiry. Go beyond that and every inquiry will lower credit scores even more.

The impact from the first credit report inquiry is about 7 points

A hard inquiry can lower your FICO credit scores up to seven points for each one. That means a FICO score can go from 730 to 723, or 700 to 693, or even 685 to 678 from one inquiry. That means after each mortgage prequalification, your FICO scores will drop about seven points. This is important to remember.

Mortgage lenders grade FICO Scores by 20 point increments.

Mortgage lenders grade your FICO scores by 20 points primarily starting at 620. These are the grades.

620 to 639

640 to 659

660 to 679

680 to 699

700 to 719

720 to 739

740 to 759

760 and Above

Each grade higher means savings to you. On a conventional 5% down $400,000 30 year mortgage with a credit score going from 679 to 680 – a one point improvement – would save the borrower $4,000. Just one point. So each grade achieved is important to realize more savings.

A hard (credit application) inquiry does not impact scores until the following month.

A hard inquiry will not impact your FICO credit scores until the following month. That means a credit report pulled on February 1 will not impact your FICO Scores until March 1. Then the impact from the inquiry on February 1 will appear on your FICO scores for every credit report pulled after March 1.

Hard inquiries impact your FICO Scores for 12 months

The impact to your FICO Scores from the February 1 hard inquiry will be felt until January 31 of the following year, or 12 months. That means every time your credit score is pulled during that period, your FICO Scores will drop up to seven points until February 1 of the following year.

Your lender’s credit report / scores are good for 90 days.

The FICO Scores pulled the first February 1 is good for 90 days before the mortgage lender needs to pull your credit report again. There are two important points to understand here.

First, if you are not ready to purchase a house immediately, it would be unwise to have your credit report pulled right away. The reason? Any credit report pulled after March 1 will have FICO scores that are impacted up to seven points from that February 1 inquiry. That could drop you a grade from say 705 to 698, or from 682 to 675. That means it will cost you a lot more money. In the above given example, the cost to the homebuyer would now be $4,000 more.

Second, if you are trying to improve your scores, it would be best to not have the mortgage lender pull your credit report. Work through a certified non-profit credit counselor such as MyCreditPlan.org until you are ready. The reason? They do not leave hard inquiries. Any credit reports requested through a non-profit credit counselor DO NOT IMPACT your FICO Credit Scores.

When you are ready, then go to a mortgage lender and as long as you close within 90 days, the mortgage inquiry does not impact your scores.

For this reason, it is best to utilize a non-lender service until you are ready to purchase your home. My advice is go to MyCreditPlan.org so you can save yourself a FICO Score drop when looking for a home.