How to Shop for a Mortgage Refinance Without Hurting Your Credit

If you are preparing to refinance your mortgage loan, it’s smart to be aware of how shopping and applying for financing can impact your credit. Because, truth is, your credit rating may temporarily drop before and after closing on a refi loan, and it’s important to understand the ramifications of that. 

How Your Credit is Affected by Applying for a Refinance

Your three-digit FICO credit score, which can range from 300 to 850, indicates your creditworthiness – the extent to which you are a good or bad risk to lenders or creditors. Many lenders and banks require or at least prefer a credit score of at least 620 for conventional loan refi applicants; FHA and USDA refinance loans can often be had for a credit score as low as 580 and 640, respectively (VA loans don’t set a minimum credit score requirement).

Here’s what happens when you apply for a mortgage refinance loan: The lender will review your credit report, which represents a record of your credit history. This check is considered a “hard inquiry,” which can result in a temporary dip in your credit score.

“Every time a lender checks your credit this way, it can affect your credit score. Shopping around for the best mortgage rate among several lenders may trigger multiple hard inquiries, which can cause a dip in your credit score,” cautions Alex Shekhtman, CEO/founder of LBC Mortgage.

The duration and extent of your credit score decrease will depend on different factors, including the total number of inquiries, the type of credit you are applying for, and how recent the inquiries are. Typically, the consequence of hard inquiries on your credit score is relatively small, with a drop of usually less than five points for every inquiry.

But these inquiries usually stay on your credit report for two years and negatively affect your credit score for up to 12 months.

Note that one-year drop in your credit score can make it more difficult to qualify for other types of financing you may want to pursue, like a car loan, credit card, or home equity line of credit. Even if you get approved for these options, you may be charged a higher interest rate because of your lower credit score.

Why Your Credit Score May Drop from a Refinance Application

Personal finance pro Andrew J. Hall, senior fund manager for Paperclip Asset Management, says a credit score drop occurs because the hard inquiry is entered into your credit report by Equifax, TransUnion, and Experian—the three credit reporting bureaus.

“Credit reporting bureaus are notoriously secretive about their exact criteria and reasoning. But the generally accepted opinion on why credit scores drop after applying for credit is that the type of person who regularly seeks credit is one who reaches beyond their means,” Hall notes.

The good news is that, if you shop around and apply for a mortgage refinance loan among several lenders within a relatively short window—typically 14 days—FICO regards those collective hard inquiries as only one hard inquiry. 

“This is useful to know, because if the credit reporting bureaus share the same credit report with a potential creditor – rather than needing to generate a new credit report – the hard inquiries will be batched together on your credit report, greatly reducing the impact on your credit score,” Hall points out. “Many loan seekers can potentially apply for 10 or more loans with only a small and temporary impact on their credit score.”

Tips to Keep Your Credit Score Safe

Want to prevent your credit score from dropping too low before or after you close on a mortgage refinance loan? Aim to follow best practices, including:

• Check your three free credit reports and credit score long before mortgage shopping. “Generally speaking, these actions will have no impact on your score. After reviewing your credit reports, you can address any inaccuracies or errors you see there, which can take some time to correct,” advises Hall. 
• Research multiple lenders and their mortgage refinance rates to find the best deal. “Many lenders offer prequalification or preapproval, which can provide an idea of the interest rate and terms you may qualify for without affecting your credit score,” says Shekhtman. “Also, be selective. Only apply for a mortgage refinance loan from lenders you are confident in and who offer the best rates and terms. Avoid applying for multiple loans just to compare rates.”
• Ask the lender to do a “soft pull” of your credit if you just want a rate quote. “This kind of credit pull provides accurate scores for a rate quote but is not reported as an inquiry for debt; hence, it doesn’t impact your credit score,” says Shashank Shekhar, founder/CEO of InstaMortgage. “Not all lenders offer a soft-pull service, so choose wisely. And remember that, when it’s time to apply for a refinance loan, a hard credit pull is necessary.” 
• Shop and apply for refinance loans within a 14-day period.
• Consider collaborating with a mortgage broker. An experienced broker can help you shop for the best mortgage refinance options without needing to apply to multiple lenders, which can negatively impact your credit score.

Lastly, don’t get discouraged if you notice a temporary credit score drop after closing on your refi. 

“This is a normal part of the mortgage refinance process,” Shekhtman continues. “Keep the credit impact in proper perspective and don’t let it discourage you from shopping around for the best rates and terms.”