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It’s true, rate shopping can hurt your credit score. “But why should I be penalized for being a sophisticated investor trying to find the best deal?” Well, the short answer is you won’t be; the long answer is you will. Ok, that wasn’t so long, but keep reading.
Let’s say you submit an application on LowerMyBills.com or LendingTree.com because you want banks to compete over you, right? That application is then sold to around 5 other companies who all race to be the first one to contact you. Ever wonder why you may receive phone calls less than 2 minutes after submitting an application at LowerMyBills.com? Because the Loan Officers (LOs) are taught that, statistically, the first person to have a meaningful conversation with you is more likely to get your business; and it’s true…statistically. Plus, by the time the 5th LO calls you, you’re so annoyed by the unleashing of World War III on your phone that you’re a tough sell.
Anyway, that first week you complete an application with 2 of those companies so they can get you a more accurate projection of rate and costs in the form of a Good Faith Estimate. But after that, you’re slammed at work or little Johnny’s sick and needs your attention, so you can’t speak to the other 3 companies for a while. A month later, you’ve completed 5 applications with the original 5 companies and had your credit run 5 separate times.
“But more than 5 people called me - you said my application was sold to only 5 companies. So how did the other 15 companies get my information?”
There are a couple answers to that. Some companies subscribe to a service offered by the credit bureaus that notifies them a couple days after a mortgage credit report is pulled. So company 1 pulls your credit for your application on the 15th; on the 18th, company 6 gets a notification that you’re shopping for a mortgage and calls to try and get in on the action. But it’s not just company 6 that gets that notification; it’s companies 6 through 18 - and they all call you.
Then, and this does happen, there is the “mortgage sales lead black market.” Some disgruntled or underpaid employee at one of those 18 companies that have now contacted you decides that he needs to make more money and sells your info to one of his buddies at another mortgage company. It’s illegal, but it happens. So you get two more calls.
You assume all 20 companies calling are a direct result of your LowerMyBills.com application, when, in fact, only 5 are directly responding to the application you submitted.
On top of the original 5 companies that ran your credit, you liked what 3 more of the “second hand” callers had to say; so you complete an application with them and they run your credit.
You’ve now had your credit run 8 times over the course of a month or so; as a result, your credit score suffers - sometimes dramatically.
Well, how can I avoid doing damage to my credit score when shopping for the best rate on a mortgage? Do all your shopping within a 2-week time frame. The credit bureaus count inquiries of the same type - in this case for a mortgage - within a 2-week span as only one inquiry. Some Loan Officers may tell you not to have other companies run your credit because your score may drop, but that’s only partially true. As long as all those inquiries occur within one 2-week time frame, you’re golden.
“Ok, that’s easy, I’ll just keep all of my mortgage shopping within a 2-week period and I’ll be fine, right?” Not really…but I’m tired of writing and that’s the topic for part 2, tomorrow, when we cover how you may be weeding out the best mortgage brokers. After that I’ll wrap up the Mortgage Shopping Series is part 3 by showing you how to really shop for a mortgage.
Thanks for reading!
John Crenshaw, TruthfulLending dot Com
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