Here's What Happens to Your Credit Score if You Get Pre-Approved by 10 Mortgage Lenders

Since I'm a Certified Financial Planner®, friends and family often ask my advice on a variety of financial topics, including buying a home. And they're often surprised when they ask me what the most common mistakes people make are.

My answer is always the same: One of the biggest and most common mistakes home buyers make is to simply apply for one mortgage and accept whatever mortgage rate and fees they're offered. In many cases, shopping around for a mortgage can be more important than negotiating the home price itself, as we'll see in a bit.

Many people have the common misconception that applying for loans with a bunch of different lenders will have a big adverse effect on their FICO® Score. This simply isn't the case. While it's certainly true that applying for new credit can harm your score, there's a special rule that applies when you're shopping around for a mortgage.

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The FICO rate-shopping rule

The FICO credit scoring formula gets 10% of its weight from a category called "new credit." This considers any credit inquiries (times you apply for credit) from the past 12 months. And if you're applying for a lot of credit at the same time, it can have a major negative impact on your score.

However, the FICO formula has two separate rate-shopping rules:

• First, any inquiries involving mortgages (or auto loans) made within the last 30 days aren't considered.
• Second, any mortgage inquiries that take place within a "typical shopping period" will be considered as just one credit inquiry, regardless of how many loans you apply for. Depending on the exact version of the FICO formula, a typical shopping period is defined as either 14 or 45 days.

So, if you spend an afternoon applying to 10 different mortgage lenders, it won't affect your FICO® Score at all for 30 days. Beyond that point, they'll be treated as a single inquiry.

Having said that, while 10 different credit inquiries counting as one is certainly a helpful rule, it's important to note that even one inquiry can have a minor negative impact on your score. However, it isn't likely to drop by more than a few points from a single inquiry, and the decline is typically short-lived.

Here's why rate shopping is so important

Let's say you're under contract to buy your first home for $500,000 and you're planning to make a 20% down payment, so you'll need a $400,000 mortgage. The first lender you apply for offers you a 6.5% APY. After doing some rate shopping, you find a 30-year mortgage with the same origination fees as the first, but with a 6.375% APY.

This might sound like an insignificant difference. However, the lower rate would result in a $35 difference in your monthly payment -- that's $12,600 in savings over the 30-year mortgage term. That's why in many cases, it can be even more important to shop around for a loan than to negotiate a few thousand dollars off the home's price.

The bottom line is that shopping around for a mortgage can take a significant amount of time, but it can be well worth the effort. In the above example, even if you spent a grueling 12-hour day on mortgage applications, you'd be getting over $1,000 per hour in interest savings for your trouble.