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Although you need to compare lenders when looking for a home loan, you may not realise that, if done incorrectly, home loan shopping can have a damaging effect on your credit report.

Although you need to compare lenders when looking for a home loan, you may not realise that, if done incorrectly, home loan shopping can have a damaging effect on your credit report.

Borrowers have been declined for a home loan when their good credit history has been tarnished by multiple credit enquiries on their credit report. These enquiries are recorded each time a lender requests a copy of your credit report when they are assessing eligibility for a loan. This doesn’t just apply to home loans. If you have applied for a car loan, personal loan, credit card, store card or even an interest free facility, it will appear on your report.

Lenders don’t know from the enquiry on the credit report if it resulted in you taking up the loan, changing your mind or being declined.  Lots of credit enquiries will result in the lender being more cautious. This is because the more enquiries, the higher the likelihood that you may be having trouble getting a loan or that you may have taken up credit contracts that haven’t been declared.

This is why exercising caution when shopping for home loans is so important. When enquiring about home loans, you should not hand in an application form unless you definitely want to obtain a home loan with that lender. 

However, with some lenders, you are able to get an indication of whether your application will be successful without formally applying. At State Custodians, the Instant Pre-approval tool can give you a conditional pre-approval for a loan based on the information you provide, such as income, financial commitments and loan amount. However, this information is not verified and your credit report has not been accessed, so it is a general indicator only. But, it does mean that there will be no hits on your credit report as a result.

It is only when you formally apply for a home loan by filling in an application and supplying your documents, that your information is verified and your credit report is reviewed as an essential part of the approval process.  So, when you are making enquiries to lenders and credit providers, always ask if and when they will be conducting a credit enquiry. Only allow this to be done once you are confident that you want to proceed. In this way you are protecting your reputation as reflected in your credit report.

Multiple credit enquiries can mean the difference between your application being approved or declined, so it is essential to be wary when home loan shopping.