The Risks of Comparing Mortgages to Your Credit Score
When applying for a mortgage, your credit history will significantly impact the loan amount and interest rates you qualify for. Canadian credit scores range from 300 to 900, but it is good to aim for a minimum score of 620 if you hope to qualify for a mortgage with a AAA lender such as a bank.
You may have heard that shopping for different mortgage rates can lower your credit score. In most cases this is not true. Over the last few years, credit bureaus have made some important changes to the way they calculate your credit score. One of these changes relates specifically to credit bureau reports being requested for the purpose of mortgage applications.
But what exactly are the risks of comparing quotes from multiple lenders? Understanding how mortgage comparisons impact your credit score can help you make a better-informed decision.
Types of Credit Checks
As a Canadian consumer, you can encounter two types of credit checks: soft credit and hard credit checks.
Soft credit checks verify financial information and usually do not lower your credit score. You may encounter a soft credit check if your employer is conducting a background check, if your current bank is checking your credit for any important updates, or if you are checking your own credit report. Sometimes, this type of check can occur without your knowledge, although you likely consented to ongoing soft-pull credit checks when you originally signed the application, employment agreement, or banking agreement.
Hard credit checks involve a formal request for your credit report filed to a central credit bureau. Unlike soft checks, this type of credit check requires your pre-authorization but will decrease your FICO score by a few points. Hard credit checks are usually only conducted when you seek new credit or additional credit, such as when applying for major loans, new lines of credit, or credit cards.
As you may have already guessed, asking for a mortgage quote involves conducting a hard credit check. Fortunately, credit bureaus such as Equifax recognize that mortgage shopping does not carry the same risks as other types of hard checks and do not tend to penalize this behaviour. When shopping for a mortgage, credit bureaus in Canada understand that a borrower might want to shop several lenders prior to making a decision in order to ensure they are getting the best rate and terms for their needs. As a result, if you have your credit pulled multiple times within a 30-45 day period for mortgage purposes, the lender or brokerage will have a specific code assigned to this credit check that tells the bureaus that you are not a credit-seeker, but rather shopping around for the best mortgage. As a result, they will no longer penalize your credit score for multiple credit checks for mortgage purposes within this 30 to 45 day period.
By employing a few expert tips, you can further minimize the impact of comparing mortgages and preserve your credit score.
Best Ways to Compare Multiple Mortgage Quotes
Whether you are an aspiring first-time homeowner or looking to expand your real estate portfolio, shopping for mortgage rates is always a good idea. Although comparing mortgages may come with risks, there are steps you can take to minimize the impact on your FICO score.
As mentioned before, credit bureaus do not consider mortgage shopping to be high-risk behaviour. As a result, several policies and loopholes are in place to protect your credit score.
As mentioned previously, all mortgage rate inquiries conducted within a four-week to six-week window (starting from the time of the first inquiry) will be counted as one single hard credit check. This means that you could contact 30+ lenders within the same month and only be charged a five-point penalty on your credit score.
You could also ask lenders not to pull your credit report, preventing any hard inquiries. While some lenders may refuse this request, other lenders might be willing to give you a rough quote based on the information you provide. This loophole may allow you to “shop” for mortgages without submitting hard inquiries.
Another option is to consult a Clover Mortgage broker. Our team has years of experience funding mortgages with over 50 different lenders, and we have a deep understanding of the typical rates and terms each one provides. We can discuss estimates for each lender based on the financial information you provide. The more comprehensive your description, the better.
Besides these options, here are a few more of our recommended best practices:
- Understand your credit report: if you are going to ask for rough quotes without a hard inquiry, you must understand the full scope of your credit report. It is a good idea to request a copy of your report, which will be deemed a soft check and will not impact your credit score. Before you begin contacting any lenders, it is a good idea to identify and fix any errors on your credit report so that you go into the process armed with correct information.
- Raise your credit score ahead of time: regardless of the lender, having a higher credit score will land you lower rates when dealing with AAA, B, and even some private lenders. You increase your odds of landing an ideal rate by improving your credit score before beginning the mortgage shopping process. The easiest way to raise your credit score is to use ten to twenty percent of your credit card limit at any given time and pay it down immediately. Repeating this process consistently demonstrates your ability to spend responsibly and make timely repayments. This will reduce your perceived risk as a borrower and raise your credit score.
How to Find the Right Mortgage Quote for You
Comparing prices from several lenders is one of the easiest methods to lower your mortgage costs. The best deal when it comes to mortgages is the one with the lowest interest rate, closing charges, and right terms for your needs and goals. Your mortgage likely represents the most significant financial commitment you will make. As such, it is wise to shop around for your options before making a final decision.
The best way to find a reasonable mortgage rate is to compare offers from competing lenders. Ideally, you should include different lenders such as banks, credit unions, trust companies and small, private lenders in your search, depending on your needs and financial situation.
Provide all the lenders you contact with the same details, including your expected credit score, current debts, mortgage loan amount required, down payment, loan term, and type, property value, and more. You can then receive a mortgage loan estimate from each lender, including details about the rate and terms they can offer. You can also negotiate your terms by presenting competing offers from other lenders.
Because of the window of time you likely have to work with, Clover Mortgage can help expedite the shopping process and connect you with the perfect lender in a time-sensitive manner
Unlike some brokerages out there, we have worked and funded mortgages with over 50 different lenders. This means we are uniquely positioned to advise you on potential quotes and allow you to narrow your search pool of lenders efficiently.
Our Clover Mortgage team of underwriters is highly skilled and has access to hundreds of different mortgage products. Following a personalized consultation, we can compare your financial profile across a wide array of unique lenders to connect you with the best rates and terms available to you.
If you are ready to begin looking for a mortgage, contact us today for a free consultation!