In a marketplace where lenders are demanding record-high FICO credit scores – Fannie Mae and Freddie Mac are averaging around 760 on approved mortgages this year – 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. Do multiple inquiries – requests by lenders and others to pull your national credit bureau reports – knock your score down? Do you know whether your lender is entering the correct code to minimize damage to your score when you’re shopping for a mortgage and generating lots of inquiries? If you’re young or otherwise new to the world of credit, could multiple inquiries do enough damage to prevent you from getting approved for a home purchase?
Given the importance of maintaining high scores, FICO senior scientist Frederic Huynh agreed to run through the key rules governing how inquiries affect homebuyers and mortgage applicants in an interview with me and a post on Fair Isaac’s Banking Analytics blog.
Start with the basics: Yes, racking up large numbers of inquiries can lower your score. The FICO models consider them significant because extensive behavioral research has shown that “consumers who are seeking new credit accounts are riskier,” more prone to defaults, according to Huynh. “Statistically, people with six or more inquiries on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports,” he said. So inquiries do matter.
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 experts in the credit-reporting field say that despite FICO’s good intentions, bad things can happen on inquiries. This is especially true for people with “thin” credit files, such as young, first-time homebuyers and others without extensive credit histories. 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 suddenly appeared on her credit reports. This deflated her FICO score to 610 – a loss of 30 points and put her below the minimum score required for the mortgage.