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Saturday, April 21, 2007

The Truth About Credit Inquiries

I often speak with potential borrowers who do not want their credit pulled because they fear the inquiry might ruin their credit.  I try to explain that an inquiry can not ruin a credit score, it certainly affects the score but not to the degree the public believes. The mortgage application process essentially starts with pulling credit on the potential borrower. There is very little a lender can do without knowing your score. Even with a great job history and high income, a bad credit score can dramatically alter the loan program. I can not offer any professional advice without knowing your credit score.

You might wonder why a borrower should be penalized for simply requesting credit in the first place?  From looking at the models used to calculate the FICO score, credit inquiries do not affect the score more than a few points.  Inexperienced borrowers with a short credit history or thin credit lines are the ones most likely to be affected by rapid inquiries.  It is also relevant to note that a recent study by Fair Isaac found that borrowers with more than six credit inquires were eight times more likely to declare bankruptcy.  As you can see the model needs to penalize the borrower slightly to keep the entire system honest.

Now returning to the original question.  Last August (2006) changes were made to the old scoring model.  Under the new system any mortgage or auto related inquiries in the most recent 45 days are scored as just one inquiry.  Under the old model it was 14 days. This means you can take your time to make a mortgage decision and allow your lender to provide the necessary documentation so you can do a proper evaluation.

I have always thought this short time window as anti-competitive.  You do need to give borrowers the opportunity to shop around and not be penalized for doing just that.  We are a society that values competition and choice. The new model is better aligned to this goal.  The new model doesn’t give you a license to go out and shop endlessly but it does give you the opportunity to find the product of your choice and preference.

Shailesh Ghimire
CTX Mortgage Co.
www.aimeeloans.com
www.azmortgageguru.com
(480) 516-1851 / (480) 516-1819
Email me

Posted by Shailesh Ghimire, AZ Mortgage Guru on April 21, 2007 | Permalink

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