Online loan applications could hurt credit score

Be careful when applying for a home equity loan online

The growth of the Internet has made it easier than ever to buy or sell a home online. Instead of driving all over town or all over the country, potential buyers can simply browse through a selection of homes using their Web browser from the comfort of their own home. And the technology doesn’t end there. One can just as easily shop for a home loan or mortgage online as they can for a house itself. 

Just as there are thousands of Websites devoted to selling houses, there are dozens of sites devoted to selling home loans. The market for real estate, while slowing down a bit, remains strong and will continue to do so as long as people need a place to live. All one has to do to shop for a loan online is to find some loan sites using your favorite search engine and compare rates. But be careful - how you go about searching for a home loan online can greatly affect the rates you are offered and can even have a negative effect on your credit report.

The reason for this is the difference between how you inquire about loans in person versus how you inquire about loans online. If you go into a loan office or bank and ask about rates, you can offer some general information about your income and past borrowing history. In return, the lender can offer some general information about their loan rates. It’s a way of “feeling each other out.” You can get a general idea of how much you will have to pay for a loan in terms of interest rates, points and closing costs without actually having to apply for a loan or having the lender run a credit check on you. If you are serious and like what you have heard from a particular lender, you can formally apply and receive an accurate quote regarding prices.

If you apply online, the situation is different. Most Websites have automated inquiry mechanisms that handle the rate quotes. In order to get a quote, you will have to fill out a form that requires you to provide your Social Security number to the lender. You are, in essence, agreeing to let the lender run a credit check on you when you fill out the form. Once the lender has done that, which takes only a few minutes, they can get back to you with an offer of a price. Most lenders will then follow up that online quote with a phone call from a representative.

There is no problem in having a credit check done; many people do that every day. The problem comes from how you have the credit checks done. A number of inquires about the same sort of thing that occur within a two week period are generally treated as one inquiry by the credit bureaus. On the other hand, if those inquiries are spread out over time, those inquiries may be treated as separate inquires. A number of separate inquires over a prolonged period of time can actually reduce your credit score! Why? Because people who apply for a lot of credit in a short period of time are often seen by lenders as “desperate.”

Does that mean that you shouldn’t shop for loans online? No, but you should make sure that you make a concerted effort to do it all at once, rather than spreading it out over a period of longer than two weeks.