Inquiries by potential borrowers can affect credit score for mortgage

6/10/2012

WASHINGTON -- In a marketplace where lenders are demanding record-high FICO credit scores -- Fannie Mae and Freddie Mac are averaging about 760 on approved mortgages this year -- many potential borrowers are a little fuzzy about what can push scores up or down.

Take "inquiries," which Fair Isaac Corp., developer of the score methodology dominant in the mortgage field, says are among the most widely misunderstood components of its system.

Given the importance of maintaining high scores, Frederic Huynha, senior scientist at FICO, agreed to run through the key rules governing how inquiries affect home buyers and mortgage applicants.

Racking up large numbers of inquiries -- requests by lenders and others to pull national credit bureau reports -- can lower a score.

Extensive behavioral research has shown that "consumers who are seeking new credit accounts are riskier," more prone to defaults, according to Mr. 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.

But this doesn't mean that if six lenders pull the credit reports of someone who is shopping for a home loan or refinancing, the potential borrower is going to be hit with six separate inquiries resulting in a lowering of his credit score.

Mr. Huynh said the FICO models 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 count only 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.

He said a single inquiry usually is not a big deal, knocking fewer than five points off a 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 home buyers 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, said a recent applicant lost her preapproved 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, putting her below the minimum score required for the mortgage.

According to Mr. Nelson, unless loan officers properly code the purpose of the inquiry when they report it to the national credit bureaus, it won't necessarily be identified in credit files that way.

Mr. Nelson says glitches like this "are becoming more commonplace" and can hurt unwary consumers. He strongly urges mortgage applicants to avoid all credit-related shopping in the weeks before their closing because a string of inquiries can pile up and knock the home purchase off track or delay it.