Loan inquiries can hurt credit score
WASHINGTON — Are you a little fuzzy about what can push your scores up or down?
Take "inquiries," which Fair Isaac Corp., the developer of the iconic score methodology dominant in the mortgage field, says are among the most widely misunderstood components of its system.
Given the importance of maintaining high scores, FICO senior scientist Frederic Huynh agreed to run through the key rules governing how inquiries affect home buyers and mortgage applicants.
Start with the basics: Yes, racking up large numbers of inquiries can lower your score. The FICO models consider them significant because research has shown that "consumers who are seeking new credit accounts are riskier," more prone to defaults, according to Huynh.
But this doesn't mean that if you're shopping for a home loan or refinancing, and six lenders pull your credit reports, that you're going to be hit with six separate inquiries and have your score lowered. The FICO models, says Huynh, ignore all mortgage-related inquiries during the 30 days immediately preceding the computation of the score. All mortgage inquiries during the 45 days preceding your loan application only count as no more than a single inquiry. The same buffer zones cover shopping for auto loans and student loans — but no other forms of credit.
In any event, says Huynh, a single inquiry usually is not a big deal, knocking less than five points off your score per pop. But despite FICO's good intentions, bad things can happen on inquiries. Larry Nelson, owner of KCB Information Services in Pekin, Ill., a credit reporting agency active in the mortgage field, says a recent applicant lost her pre-approved home loan at closing because five new inquiries for an auto loan appeared on her credit reports. This deflated her FICO score and put her below the minimum score required for the mortgage.
Auto loans are one of the three protected classes of credit where multiple inquiries within a short time period are okay. But unless loan officers properly code the purpose of the inquiry, it won't necessarily be identified in credit files that way. For Nelson's home buyer, none of the inquiries that should have been covered by the 30-day buffer carried the correct identification. Plus Fannie Mae and Freddie Mac have begun requiring lenders to pull a second set of credit reports immediately before closing to ensure that applicants' FICO scores haven't changed significantly. In this case, there was a sudden spike of score-injuring inquiries in the bureaus' files and the buyer couldn't close on the loan.
Nelson says glitches like this "are becoming more commonplace" and can hurt unwary consumers. He strongly urges mortgage applicants to avoid all credit-related shopping in the weeks before their closing because a string of inquiries can mount up and knock the home purchase off track or delay it.