Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Credit report inquiries

Dear Dr. Don,
We are a couple months into our search for our first home, and are a little confused about searching for a mortgage. We know we should get many opinions on rates, so we can get the best deal. We also know that at some point in the loan process each loan institution we talk to will do a credit check to see if we're worthy.

Our question is: How far in the loan process can we go with each loan institution to find out estimates of what interest rate and loan amount we can get without having our credit checked each time, thus eroding our credit rating each time we talk to another lender?

Does getting prequalified or pre-approved involve credit inquiries? Oh, and by the way, what's the difference between getting prequalified and pre-approved?
Thank you!
Joe Jury

Dear Joe,
A prequalification is the lender's estimate of the mortgage amount that the borrower will qualify for while a pre-approval is a written commitment from the lender stating the size of the mortgage available to the borrower.

Getting pre-approved means that you don't have to write a mortgage contingency clause into your offer. In a hot real estate market, a pre-approval letter can give your offer a competitive advantage. Regardless of the tone of the real estate market, you're identified as a serious buyer if you already have your financing in place when you make your offer.

It's best to assume that every time a lender asks you for information and comes back to you with a rate estimate that you have added a credit inquiry on your credit report. Inquiries stay on your credit report for two years. Multiple inquiries can lower your credit score -- except when comparison-shopping for an auto or mortgage loan.

Lenders use Fair, Isaac and Company's credit scoring models, which in turn are based on your credit report from one of the consumer reporting agencies to help determine your creditworthiness.

The MyFico site, a joint venture between Fair Isaac and Equifax, isn't as specific as Fair Isaac's Web site once was on how the firm groups like inquiries so comparison shoppers aren't penalized with a lower credit score. But the firm still assures us that consumers aren't hurt by multiple inquiries by stating that: "FICO scores do a good job of distinguishing between a search for many new credit accounts and rate shopping, which is generally not associated with higher risk."

In a past column when I wrote on this topic, Fair, Isaac and Company explained on its Web site that the method they use to compile a FICO score ignores all auto- or mortgage-related inquiries in the previous 30 days. They call this the buffer period.

Multiple mortgage or auto applications won't count against you during the buffer period because it's apparent that you are comparison-shopping. Auto and mortgage inquiries prior to the buffer period are bundled together in 14-day groupings. It's not clear if this is still the standard or if the credit-scoring model has changed.

My recommendation is to order a copy of your FICO credit score and Equifax credit report. You'll have a pretty good idea from that what kind of credit you have.

Use Bankrate's How much house can you afford? calculator to give you an estimate of what size mortgage you can carry. Then keep abreast of interest rate trends using Bankrate's Rate Trend Index.

Finally, shop rates in your market using the best rates feature. You'll be able to focus your search and minimize the number of additional credit inquiries on your credit report. Good luck!

-- Posted: March 4, 2002