Applying for a mortgage means the lender pulls your credit. It also means you get an inquiry on your report. This lets any other lenders know that you recently tried obtaining a new account. However, what the inquiry does not show is whether or not you were approved for the new account. In other words, getting denied for a mortgage does not affect your score at all.
What the Credit Inquiry Shows
A credit inquiry lets others know someone else recently pulled your credit. Each time someone pulls your report, your score gets hit around 5 points.
What happens if you shop around for a mortgage? Let’s say you inquire with five lenders, will you lose 25 points? Luckily, the answer is no, but only if you shop around fast. In other words, don’t get a quote from one lender one day and then wait 3 weeks for another. Try to shop around within a 2-week period, making your determination within that time. This will only count as one inquiry as FICO recognizes the need to comparison shop.
Now, if you applied for a mortgage, car, and credit card within a week’s time, that would be a different story. This is a red flag for lenders. It shows that you are trying to take out many different types of credit. Your score will be impacted accordingly. The more inquiries you have, the higher your likelihood of bankruptcy in the future, which is why FICO creates the lower credit score consequence.
What the Credit Inquiry Does Not Show
The credit inquiry does not provide information regarding whether you were approved or denied for a mortgage. In other words, multiple inquiries for a mortgage could mean that you did not receive an approval or that you were just shopping around. There is no differentiation.
Your credit score is affected the same way no matter what the outcome. An inquiry is an inquiry – FICO is not aware of what happens next unless you take out a mortgage with that lender. The new trade line then becomes a part of your credit report.
What to Do After a Mortgage Denial
What happens if you do get denied a mortgage? Are you banned for life? Luckily, all it takes is to correct the offending information that caused the denial.
For example, let’s say your credit score was too low. Again, FICO does not know the reason the lender turned you down. But, the lender must tell you the reason. If your score is too low, you can work on improving it. Ask for a copy of your report, which the lender must provide if they turned you down based on the information provided on the report. You can then go over it and see what is causing the low score. Is it late payments? Do you have too many revolving accounts? Are your accounts too new? Once you know the reason, you can work to improve your score. The changes won’t happen overnight, but with diligent and consistent work, you can get it to increase.
Mortgage denials are not always a consequence of a low credit score, though. Maybe your income is unstable or too low. You may also have too many debts. The lender can give you specifics on the reason and then you can work to rectify the situation. If your debt ratio is too high, you have two choices: increase your income or lower your debts. You can secure a second job to increase your income or you can start making higher payments towards your debts to get rid of them.
As you can see, there are many ways you can rectify a mortgage denial. Your credit score is not impacted by the denial. It is impacted, however, by multiple inquiries if they keep happening. Make your application for a mortgage methodical and time it right. You know if your income is too low or if you made late payments recently. Both of these issues could cause a denial. Minimizing a turn down can help minimize the number of inquiries on your credit report. In the end, you come out the winner, but it takes some work to get there.