Credit checks can be a frustrating obstacle for many aspiring homeowners. These checks are often treated as a necessity, even though they can cause negative effects on your credit score. As a result, shopping around for a mortgage past the designated 45-day window can cause your credit score to descend.
Credit checks have become a precarious situation for many home buyers because of the way credit inquiries work. Most mortgage lenders make credit inquiries when you apply for a loan. One of the country’s credit bureaus is then notified of the inquiry. The three major credit bureaus in the United States (Experian, Equifax, and TransUnion) use this information to calculate a FICO credit score. There is another major credit bureau known as Innovis, but unlike the other three, it does not provide a FICO credit score.
A FICO credit score can affect credit holders’ ability to take out loans for cars, future homes, smartphones, and other expensive amenities. In FICO’s eyes, the more debt you take on, the closer you are to becoming a high-risk borrower. Because credit inquiries are a sign that you may be adding to your debt, your FICO credit score lowers after a mortgage lender makes a credit inquiry.
Multiple credit inquiries in quick succession are also a bad sign because they signify greater credit risk. However, most prospective home buyers are given a 45-day window to shop around for mortgages. During this period, multiple mortgage-related credit inquiries will only count as one inquiry because most creditors understand that you will likely buy only one house. Most people consider it prudent to shop around for mortgages during this period, but customers with lower credit scores may want to avoid even a single inquiry affecting their credit scores.
A solution to this problem is finding small mortgage lenders that are willing to run your credit check only after preliminary approval. For example, they can assess your mortgage application based on your own provided credit report and then do all other due diligence to see if you qualify, before they run the final check.
A few years back when I was doing a refinance, I found a lender that did this for me. It was called Real Estate Funding Solutions, a mortgage broker based in Clifton, New Jersey and New York founded in 2000. The company will not perform credit checks or SSN checks on clients until their deals are fully approved. Instead, its loan approval process allows clients to use credit reports, which can be obtained without lowering their credit scores.
CEO Gary Sinks says that he initially came up with the idea when he was launching his company to try and set it apart from the competition. He says that over 90% of the company’s clients opt to run the credit check after the preliminary loan approval.
Too bad not all mortgage brokers would do what Real Estate Funding Solutions does. Unfortunately, they only operate in New York and New Jersey, so if you are not in one of these states, reach out to your local brokers to see if they are willing to do the same for you.