We address these questions with clients every day. You have worked hard to build credit, and you want to protect it, that’s understandable. But you have also finally arrived at the point where you want to use your great credit to borrow money, and that requires letting a lender see it. It’s like going to a doctor for a check-up but not letting them take your temperature or draw your blood. The joke we use is that it’s like getting a flu shot…it will only hurt for a second, we promise! But in all seriousness, your concerns are valid and very common.
Clients fear a hard credit inquiry due to the myth that a hard credit pull will tank their credit scores. While too many hard inquiries will have a negative impact, that generally pertains to unsecured credit lines such as credit cards and personal loans. Too many hard inquiries in a short time could make it look like you’re seeking loans and credit cards that you may not be able to pay back. Hard inquiries for secured debt such as a mortgage are a different story.
The credit bureaus and scoring models have evolved over the past several decades to allow a consumer to shop for financing from various lenders without penalty. To achieve this, the credit bureaus now recognize and treat multiple inquiries for similar types of financing as a single inquiry. Under the current models, you generally will not be penalized for multiple inquiries for one loan type (such as a mortgage) made within a 14-45 day period, depending upon the scoring model.
Even though these changes were made decades ago, fears around hard inquiries are still alive and well today. One reason this myth persists is that no one is allowed to have a perfect credit score. The FICO scoring model provides 4 reason codes to explain why you don’t have perfect credit, and the first code on nearly every report is 001 TOO MANY INQUIRIES. When people see that, it reinforces the belief that hard inquiries drop their scores, and they get protective. It’s understandable, but it’s simply a misconstrued fear.
Also leading to confusion around FICO scores is that there are 16 different FICO credit scoring models with Experian and Equifax. There are 21 with Transunion! This means you technically have 53 different FICO scores! As a consumer, you typically only see versions 8, 9 or 10, but lending decisions in the mortgage industry are based upon the earlier and more conservative versions 2, 4, and 5. These deliver lower scores than the more liberal recent versions. There are other scoring models besides FICO, such as Vantage Score provided by Credit Karma, of which there are currently 4 versions. All these scoring models generate different scores and lead to widespread confusion.
While the FICO score is important and plays a part in the process, it is only part of the puzzle. The data a credit report provides to a lender on current account balances, account limits, monthly payments, and payment history are all critical variables needed to calculate your debt-to-income ratio. This is the key determining factor of your ability to repay the loan and is even more important than the FICO score.
Often clients will suggest providing us with a copy of their credit report that they obtained directly. Setting aside the different versions of FICO that we already addressed, there are other reasons that this is not practical or effective. Obtaining a credit report directly from a verified third-party allows our software to read the reports, import the liability information and calcualte accurate debt-to-income ratios. The format of the report is also accepted by the underwriting software platforms used by Fannie Mae, Freddie Mac, the FHA, USDA, and VA, the agencies that issue automated loan approvals.
The bottom line, a single hard inquiry for a mortgage loan, or even multiple inquiries within a 15-45 day window will not have a drastic impact on your credit score. More importantly, the data provided within the report is required to determine your eligibility and affordability. Perhaps the most important reason to run credit is that it will uncover potential issues and problems early in the process and allow more time to address and correct them. Even if you believe your credit is good, even small improvements can make a difference in your interest rate and fees. The more you can improve your credit score before closing, the better interest rate and loan terms you will ultimately receive.
Running credit is required so you can make an Informed® decision. It will only hurt for a second, we promise!
Author: Chris DeMatteis, NMLS ID 214872
