Will shopping around for a refinance affect my credit?

Q: I'm considering refinancing my mortgage, and know that I need to shop around to get the best possible deal. However, I've heard that having a number of inquiries into my credit can lower my credit score, and I don't want that to happen. I want to compare quotes but no one will tell me anything unless I fill out an application. Will multiple refinance applications affect my credit?

A: With regards to shopping for a mortgage and placing applications at multiple places, there's both good news and bad news. The good news is that if you do place a bunch of applications to various lenders in a fairly short period of time -- say, over a month -- the credit bureaus will see you are shopping for a mortgage and generally treat these as just one inquiry -- so there should be no impact on your credit score.

The not-so-good-news is that the same cannot be said for the impact on your wallet. When you place an application with a mortgage lender, they will generally collect a non-refundable fee, most commonly to cover the cost of reviewing your credit and scheduling an appraisal. These fees typically run a few to several hundred dollars, and should you back out of a deal, you won't get your money back. As such, placing multiple applications can be costly.

If you've made the decision to refinance, you might first check with your lender or servicer; they may (or may not) be able to offer you a simplified refinancing process. If you do want to shop among other lenders, we suggest doing some advance legwork, including getting your FICO score directly from FICO (this is the score most lenders will use to qualify you), get a working estimate of the value of your home and your current loan-to-value ratio, and also decide how you want to pay refinance closing costs and what new mortgage term you want..

Armed with this information, now you should contact lenders. Since you'll be able to help pinpoint the kind of borrower you are, you should be able to get solid working quotes from a number of lenders without applying. There's a big difference between contacting a lender and saying "I'm thinking about refinancing. What can you offer me?" and "I'm looking to refinance. I have a FICO 726, the loan would have about a 72% loan-to-value (LTV) ratio, I want a 20-year term and want to use some equity to pay closing costs." One requires the lender to pull your credit and possibly more to see where you fit, and the other provides almost everything needed to give you a working price (rate and fees).

Until you've done some homework and research and are ready to move forward on a deal, there's usually no reason to place applications anywhere. To recap: If you do find you will be shopping the open market, please know that the credit bureaus usually treat multiple applications for a mortgage submitted to different lenders as a single entry in your credit file, so there should be no undue effect on your credit rating... but there will be on your pocketbook.

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