Question 7. What does it mean when my mortgage broker
is "shopping" my loan?
When a consumer applies for a mortgage, many times your loan officer needs to "shop" the loan with multiple lending sources. This means presenting the application information to various lenders to obtain approval based on personal information - credit score, financial information and job history. Where one lending source may say no, another may say yes. Each lender may also give you different terms on the loan upon approval.
Shopping your loan is normal, but there can be a down side to this activity of which the consumer needs to be aware. If done properly, shopping your loan will not hurt your credit score. However, done incorrectly, it can result in your credit score dropping 50 to 100 points. There is much misinformation floating around about how inquiries affect your credit score. We offer some clarification here
First of all, each time a different lender pulls your credit, it lowers your score. The amount the score drops differs depending on what Scoring Model you fit into. This you will never find out from FICO. So, for our illustration, assume each inquiry affects your score on an average of 2 to 3 points, a fairly accurate estimate. The incorrect assumption is that if all the inquiries are from lenders in the same industry, the mortgage industry, or all of the inquiries are pulled within a specified period of time (say 15 days), then they are all considered as one (1) inquiry. This is WRONG WRONG WRONG!!!
If the same lender pulls your report 20 times in a 15 day period, then, yes, it is considered as one (1) inquiry, but if 20 different lenders pull it during that same 15 day period, then it is considered 20 separate inquiries. With each inquiry dropping the score between 2 to 3 points, the score has now been dropped by 40 to 60 points, on an average. What else happened? It just got harder for you to qualify for a mortgage and, if you do qualify, it?s going to cost you more money because you?re now a higher risk.
Based on the above information, you might think that shopping loans is terrible and always hurts your credit score. Remember, if it is done properly, then it will not hurt your score. A good loan specialist ALWAYS provides his tri-merge credit report to each lender with which he shops your loan. This way the lender will NOT have to pull your credit. All these lenders use the loan specialist?s tri-merge to give a yes or no on the pre-approval of the loan. Once a lender has said "yes" to your loan, then that lender pulls your credit again. If all of the shopping results in "no" answers, then your credit score has not been damaged unnecessarily by all of the inquiries. Once your loan has been closed you end up with only two or three total inquiries on your report.
I have seen many consumers over the years have their credit scores ruined by incompetent loan officers "shopping" a loan around to different lending sources and ultimately lowering the credit score 50 to 100 points. Then they have the gall to tell the customer they can?t do the loan because their credit score is too low. Don't let anyone do this to your credit.
How do you control who pulls your report? ALWAYS tell the loan officer or car salesman (especially) that you give them permission to pull your credit "in house" only. You are not giving them permission to shop your loan around without your permission. And, if they do shop your loan, they are to provide a copy of their credit report for the next lender to review. This works best in the mortgage industry. In the automobile industry, this is not possible.
When you go to purchase an automobile at any major dealership, they have the ability to "shop" your loan application with as many lenders as they feel necessary to get you approved. Most only shop the application with one to three lenders, depending on your credit score. They make the judgment call. Excellent credit results in only one to three inquiries. On the other hand, poor credit can result in five to ten, or more inquiries. If your credit was bad before, it?s worse now and it just got harder for you to get a loan anywhere.
In talking with a finance person at one of the nation?s largest car dealerships several years ago., I discovered some shocking information. They have the ability to shop a credit application with 25 different lenders by simply pressing ONE (1) key on their computer. That is scary! He also indicated that they would never do this, but still, the capability was there. When you sign the loan application with any car dealership, always make a note above, below, or next to your signature, that you are giving them permission to pull your credit "in house only" and not giving them permission to "shop" your loan application with any other lender without your permission. Have them make a copy of your application for your records and insist on getting that copy before you leave.
In conclusion, shopping your loan application to other lenders is normal, but it needs to be controlled. So, always be aware of what your loan officer or sales person is doing with your loan. Ask questions, and make sure you are in control of your credit report being pulled.
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