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What Happens When a Lender Checks My Credit?

Buying a home is a significant milestone in one’s life. It’s a thrilling adventure, but it can also be filled with complexities. One crucial step in this journey is the lender’s credit check, which plays a pivotal role in determining your eligibility for a mortgage. 

This article will guide you through the steps that occur when a lender checks your credit before buying a home. 

What Happens During A Credit Check? 

A credit check from a lender is reported to the credit reporting companies (Equifax, TransUnion, and Experian) as an “inquiry.” An inquiry typically has a small negative effect on your credit score, usually 5 points or less. These inquiries can be seen by other lenders when they check your credit and act as a notification that you’re thinking of taking on new debt. You have the right to ask the three credit reporting companies to opt you out of other lenders’ seeing your credit being run.

You can also ask your lender to initially do what is called a “soft pull credit report” to see if you have strong enough credit to be pre-approved for a loan without having an inquiry on your credit report. At the time of making offers on homes, you will need the full credit report run to get a full credit approval. 

These inquiries are a necessary part of applying for a mortgage, so smart buyers know to apply for credit only when they need it. Applying for a credit card, car loan, or other type of loan can result in an additional inquiry that can lower your scores. Avoid applying for these other types of credit before applying for a mortgage or during the mortgage process.

Shopping around for a mortgage won’t hurt your credit. In fact, you’ll have a 45-day window where multiple credit checks from mortgage lenders are recorded on your credit report as a single inquiry. Even if a lender checks your credit after the 45-day window, shopping around is usually still worth it, as it might save you money in the long run. 

Why Is Credit Score Important When Buying A House?

Although you don’t need to aim for a perfect credit score, there are specific minimum score requirements you need to qualify for a loan, and those minimum credit scores vary depending on the type of mortgage. People with lower credit scores are considered a greater risk for lenders. 

Everyone has a credit score. Since the 1950s, the FICO score has been a standard component of consumer lending in the United States, and it assesses the risk you pose to consumers’ credit as a potential homebuyer. FICO stands for the Fair Isaac Corporation. FICO was a pioneer in creating a method for calculating credit scores using data gathered by credit reporting agencies.

What is a Good Credit Score?

The average FICO score in the United States is 714. 

FICO scores can range from poor to exceptional:

  • 800 to 850: Exceptional
  • 740 to 799: Very good
  • 670 to 739: Good
  • 580 to 699: Fair
  • 300 to 579: Poor

What Components Make Up A Credit Score?

Here are five components used when calculating your credit score:

  • Payment history – makes up 35% of your credit score and assesses whether you pay consistently and on time
  • Amount owed – makes up 30% of your score and measures the amount you owe against your available credit
  • Length of credit history – 15% of your credit score and tracks the length of time of your open credit history
  • New credit – 10% of your overall credit score and looks at how frequently you apply for credit
  • Credit mix – 10% of your credit score and assesses the types of credit accounts you hold 

Your credit score will play a fundamental role in the home-buying process. It affects not only your loan options but also the cost of your loan. Understanding how the credit score is calculated is important to avoid habits that may adversely affect it.

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