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Multiple Credit Inquiries And How It Affects Mortgage Process

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Multiple Credit Inquiries And How It Affects Mortgage Process

This BLOG On Multiple Credit Inquiries And How It Affects Mortgage Process Was UPDATED On April 21st, 2019

By Gustan Cho

Whenever consumers apply for credit such as a credit card, auto loan, installment loan, pay day loan, or mortgage loan, the potential creditor will pull credit. The end result is that consumers will have credit inquires on credit report:

  •  Credit inquiries cannot be avoided
  • It is part of life for consumers
  • Credit inquiries affect credit scores in a negative way
  • Each hard pull credit inquiry can drop credit scores between 2 to 5 points
  • Plus credit inquiries stay on credit report for two years
  • Every creditor that pulls credit will see all of the inquiries in the past two years

Credit Inquiries Reflected On Credit Report

When consumers shop for a mortgage, every lender will need to pull a credit report.

  • Each mortgage lender pulls credit their own credit
  • When reviewing the credit report, lenders will see all of the credit inquiries
  • However, lenders will not view credit inquiries that are on credit report from mortgage companies as negatives
  • Credit inquiries by mortgage companies within 60 days window period of time will not hit scores
  • Most lenders will realize consumers are shopping for a mortgage and realize that credit pulls during a short period of time is due to the fact that mortgage companies are pulling credit

Credit Inquiries Will Hurt Credit Scores

Before consumers have mortgage companies pull credit, make sure proper due diligence is done on the lender. Find out what types of overlays they have before authorizing to pull credit:

  • Even though lenders understand credit inquiries pulled by several mortgage companies, having credit pulled by more than 5 or more lenders may set off a red flag
  • Another important thing to realize is that each hard credit pull will drop credit scores by 2 to 5 points
  • Having multiple credit checks may end up dropping credit scores where consumers no longer qualify for a particular mortgage loan program
  • For borrowers with low credit scores or marginal credit scores, they should not have any more than 3 lenders pull credit

How Do Underwriters View Credit Inquiries

Whenever a mortgage underwriter sees that consumers with credit inquiries in the past year, they will require a letter of explanation for each inquiry.

  • It does not have to be a long letter of explanation
  • It can just be a statement or two
  • For example, here is case scenario:
    • had credit inquiries from mortgage companies
    • need to state on letter of explanation shopping for a mortgage
    • that is the reason for credit inquiries from several mortgage companies
  • Same goes with auto loans
  • If consumers have several inquiries from car dealerships and/or auto finance companies:
    • all letter of explanation needs to state is that were shopping for an automobile and auto finance lenders
    • shopping for better rates on an auto loan
  • With credit card companies, credit inquiries from credit card companies
    • need to state shopping for the best credit card interest rates
    • need to explain the outcome of the inquiry
    • if approved, then state how much of limit approval
  • Lenders do not view credit card credit inquiries favorably
  • This because they might think consumers might be financially strapped
  • That is why consumers are applying for additional credit

One Credit Application Can Result In Multiple Credit Inquiries

One credit application can and often times does result in multiple credit inquiries. This will definitely have a severe negative impact on credit scores and credit report.

  • For example, going to auto dealership shopping for a car
    • qualifying for an automobile loan
    • complete an auto loan application with the car dealer
    • car dealer first runs a credit report
    • the car dealer may forward credit report to an auto finance company
    • But many auto finance companies prefer to run their own separate credit report which is now another credit inquiry on credit report
  • If denied by one auto finance company, a car dealer may submit automobile application to multiple auto finance companies
  • They all run a hard credit pull on which will drop credit scores
  • A bunch of credit inquiries will show up on credit report
  • Ask who the creditor is or company that is pulling credit and how many times it will be pulled

Mortgage Borrowers should refrain from applying for new credit during the mortgage process.

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