Do Credit Pulls Lower My Score?

It's a common misconception* among borrowers that multiple credit pulls can drop their credit score during the home loan application process. However, the three big credit bureaus (Experian, TransUnion, and Equifax) state it plainly: a borrower's score will not drop when a mortgage lender pulls their credit more than once in a two-week period. Why does a lender pulling your credit not drop your score but applying for a credit card will? Not all credit checks are weighted equally. A credit card application carries more weight on credit than a mortgage loan. Credit card debts tend to increase over time, make for larger risk, which lowers credit. By contrast, mortgage debt eventually pays down to $0, so mortgage loan checks don't have as much weight on overall credit score.

Soft Inquiries

Soft credit inquiries usually happen when a person who is not a potential lender looks at an individual's credit score. For example, when you check your own credit score, an employer looks at your credit for a background check, or a lender pre-approves you for a credit card or loan offer; this is considered a "soft inquiry." There may be instances where your lender will need to make a soft inquiry at the end of your loan transaction, but this will occur on a case-by-case basis. It's also important to know that soft credit checks can be done without permission and are not customer-driven, so they will not affect the credit score.

Hard Inquiries

A hard credit inquiry is when a financial institution, such as a lender or credit card company, checks a person's credit while deciding whether to extend an offer of credit. This type of inquiry most often occurs when a person makes a large financial decision, such as applying for a mortgage or credit card. Typically, a person must authorize the third party to do this, therefore you should always be aware of any record of hard inquiry on your credit report. Hard inquiries can lower a credit score and can remain on the credit report for two years. But with time, the damage to the credit score decreases or disappears altogether. A hard inquiry will happen when you apply for:

• A mortgage
• Credit cards
• Auto loans
• Student loans
• Business loans

If you're going through the home buying process, but still shopping around for the right lender for you, avoid hard inquiries at all costs. You'll want your credit to be as high as possible when you decide on your lender, and credit inquiries make up 10% of your credit score. It's imperative to sort out your mortgage shopping within a 14-day timeframe. If the inquiries are correctly managed, the credit bureaus will acknowledge the first credit pull but ignore each following check.

Other Common Credit Questions

Q: Does a low credit score mean I can't get a loan?

A: Although your score is a factor in the approval process, there are loan options for homebuyers at almost all credit scores. The truth is this, you might have more loan options than you think. Each person's financial situation is different, so it's essential to speak with a Mortgage Advisor about your specific needs.

Q: Will my spouse's credit score change my loan options?

A: Consider a scenario in which the lender requires both parties' income to meet the home loan requirements for repayment. In this case, both credit histories would affect your loan approval and terms. If you apply jointly and meet the loan standards, one spouse's bad credit history could result in a higher interest rate. If there is sufficient income available from just the spouse with the higher credit score, this may result in a better rate^**. It's not uncommon for couples to later refinance once both scores are high enough.

Q: How can I fix an error on my credit report before applying for a home loan?

A: You can file a dispute with the credit reporting company and directly with the creditor, using the same supporting documentation. The CFPB has provided sample letters and instructions for how to submit a dispute. You can also request confirmation that the error has been removed from the consumer reporting agency. If your dispute involves identity theft, you'll want to take additional steps. The FTC has a website that helps you figure out how to combat identity theft.

Did you know we offer complimentary consultations at PacRes? Connect with a Mortgage Advisor today to learn more!

*For questions regarding your specific financial situation, we recommend visiting a financial advisor.