Another mortgage application could hurt credit
By Dana Dratch • Bankrate.com

Merely asking for credit can make your credit score drop. So what happens if your mortgage preapproval evaporates and you have to shop all over again? 

In most cases, a second round of mortgage shopping shouldn't affect you, says Craig Watts, public affairs manager at Fair Isaac Corp., the company whose FICO score and other scoring formulas are most widely used in the mortgage industry.

However, if you're on the edge between prime and subprime (usually around 630 with the most common FICO model and about 700 for the VantageScore), then even a few points makes a difference.

Here's how it works: Every time you ask to be considered for a loan and a lender pulls your credit report, that creates an "inquiry" on your credit record. Each inquiry lowers your credit score "an average of less than 5 points," says Watts. In some cases, though, inquiries don't affect your score at all.

Make all your mortgage inquiries within a 45-day window and all your applications should be bundled as one inquiry on your credit report. In addition, any inquiries made in the 30 days before your application aren't included, says Watts.

With VantageScore, which has scores ranging from 501 to 990 and is being tested by a number of lenders, that bundling window is 14 days, says Maxine Sweet, vice president of public education for Experian, one of the three major credit reporting companies.

Loan inquiries could lower credit score more than 5 points:

• If you have a very short credit history and there is little information in your file. In that case, inquiries could have a disproportionate effect on your score. • "If you have a great deal of recent delinquencies" on your report, Watts says. That signals creditors that you're already having trouble meeting your current obligations. • If a lender uses an old version of the credit reporting software that only allows a 14-day window to shop mortgages and have all inquiries count as one. The result: an extra inquiry and possibly a few more points gone from your score.

But, says Watts, "unless a person is on the cusp of qualifying for the right deal, an inquiry is not likely to be a deterring factor."

Two other questions to consider:

1. What happens if your lender goes bankrupt or changes underwriting standards after you get your preapproval?
2. What can your seller do if a change kills your loan?