While buying a house, this is not the time to start shopping for a car, loan refinance, or new credit cards. Regretfully, many buyers consistently continue to apply for new types of credit while in the home purchase process. Even after being advised not to do this! This is not the time to have a new credit inquiry. Just one additional inquiry and especially a new debt could cause one of the following negatives.
- Lower credit score
- Increase debt to income ratio
- Create more documentation
- Worse rate because of lower scores
- Deny the mortgage
Be boring during the mortgage process. Don’t keep applying for other types of credit, move money around, or change jobs. These can cause significant issues on a home purchase qualification.
What is a Credit Inquiry?
A credit inquiry is a company or person is pulling your credit report from one or multiple credit bureaus. A common question is “How many points will my score go down for each inquiry?” Credit inquiries play a factor in credit scores and account for 10% of the overall score, but there is not a specific number of points per inquiry. The effect on the score varies based on the individual’s overall credit file makeup. Therefore, it is essential to be careful in allowing a credit inquiry. But, not all inquiries are the same and not all affect credit scores. There are hard inquiries and soft inquiries. Hard inquiries are applying for credit and may affect scores. Conversely, soft inquiries do not affect a credit score.
Soft Credit Inquiries
Although soft inquiries do not affect credit scores, it is important to understand the types. They are account review inquiries, promotional inquiries, standard inquiries, and self-pull inquiries.
Account Review Inquiries
Account review inquiries include insurance quotes and employment review. These reports only display major negative information such as late payments, judgments, foreclosures, and bankruptcies. Companies check this to review your financial risk, and this is especially true for high-security clearance jobs. These inquiries do not affect your mortgage loan approval (assuming you are not getting a new job during the purchase process). So, it is perfectly fine for insurance companies to pull this type of inquiry during the mortgage process.
This credit inquiry is purely for showing an individual’s credit score to determine the type of advertising to send — companies offering credit cards, auto loans, consolidation loans, or furniture use these inquiries. These do not affect credit scores because you did not authorize or apply for credit. Credit bureaus sell your information to companies like these and mortgage companies. So, if you ever wondered why you get calls from telemarketers after applying for a mortgage. It is because of “trigger leads” which is the bureaus letting companies know you applied for credit.
Self Pull Inquiries
Pulling your credit is not applying for credit. Thus, it does not affect credit scores. Many services offer this but keep a few things in mind. Annual Credit Report is the site set up by the government to allow one free credit report without score per year from each bureau. It is true that it is important to review credit once per year for errors. Check out this article that explains how and why.
Hard Credit Inquiries
Again, hard inquiries mean that you are applying for credit and could affect credit scores negatively. A lot of credit inquiries in a short time could make an impact on a score and especially when coupled with late payments or high revolving balances. Although, changes in scoring allow for back to back mortgage inquiries or back to back car shopping inquiries to count as one inquiry. This is exceptionally better than the past where ten car inquiries could kill a score.
It is so important not to inquire into new credit during the mortgage process. If you are not sure what to do, reach out to your OVM Financial loan officer. We would much rather you ask before doing something that could be detrimental to your home purchase.
Remember that even though credit inquiries make up about 10% of a credit score, those few points could play a difference in rate or even loan approval. Even worse, the new debt from the inquiry increases the chances of these areas. Don’t believe this happens? Ask any closing attorney, REALTOR®, or loan officer about horror stories where just before closing, new debts are opened and kill the purchase. Have questions? Use OVM as a resource!