Ask the mortgage professor |
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Do inquiries hurt my credit? |
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By Jack Guttentag |
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"You keep preaching about the need to shop for the best deal, but I’m afraid that shopping will hurt my credit. I’m told that the more times lenders check on my credit, the worse my credit is going to be. Is that true?" Shopping for the best mortgage won’t negatively impact your credit rating if you do all your shopping in a short period. Since the market can change from day to day, this is the only effective way to shop anyway. Credit inquiries are a negative factor in determining credit scores. That’s because statistical studies show that multiple inquiries are associated with high risk of default. Distressed borrowers often contact many lenders hoping to find one who will approve them. As in your case, however, multiple inquiries can also result from applicants shopping for the best deal. To avoid catching shoppers in their net, credit scorers ignore inquiries that occur within 30 days of a score date. Suppose I shop a lender on May 30, for example, and the lender has my credit scored that day. Even if I had shopped 50 other lenders in May and they had all checked my credit, none of those inquiries would affect my credit score on May 30. Inquiries from April and back 11 months would, however, be counted on May 30. To avoid biasing the credit score from earlier shopping episodes, the scorers treat all inquiries that occur within a 14-day period as a single inquiry. If you shopped 50 lenders during April 1-14, they would count as one inquiry. If you spread them over April 1-28, they would count as two inquiries. You will damage your credit if you spread your shopping over many months. Because the market can change from day to day, it makes little sense to do this in any case. Circumstances can cause a consumer to shop, drop out of the market, and return later when conditions are more favorable. You minimize the adverse effect by concentrating each shopping episode to 14 days or less. Can a Spouse's Debts Be Disregarded? " My fiancee has good income and good credit. I am a college student with a lot of debt, and no income because I won't be out of school for a year. If we buy a home now, will my debts figure into the amount of house we can buy?" If your fiancée buys the home in his name, he is the borrower and your debts are irrelevant because you are not part of the transaction. If you buy the home jointly, the lender will require your name on the mortgage. The mortgage creates a lien against the property. Without both names, the lender would not be able to foreclose in the event of default. The question is whether, in the event that you buy the house jointly, the lender will require that your name also be on the note. The note is the obligation to repay. Lenders differ on this. If the lender requires that you be on the note, then your debts would be counted in qualifying for the loan. Does Deferred Student Debt Count Against You? "When determining whether a borrower's income is large enough to meet expenses, will a lender include in expenses student debt on which the payment is deferred"? In qualifying loan applicants, lenders generally apply a maximum ratio of total housing expense-to-income, often 36%. The housing expense includes the payments on other debts of all kinds, including student loans. The general rule is that deferred payments will be included as an expense if they begin within the first year of the mortgage. If the payments are deferred more than a year, they won't be counted unless the amount involved is very large, or the borrower's credit is weak. This is a judgment call on the part of the underwriter. The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com. *** Do you have a comment about this story? |
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Copyright 2000 Jack Guttentag |
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