This article highlights the difference between a soft credit pull and a hard credit pull, and explains why soft credit pulls make sense for buyers early in their real estate journey.

As a homebuyer, navigating the mortgage process can be complex and overwhelming. One crucial aspect that often causes confusion is the difference between soft and hard credit pulls. Understanding how these two types of credit inquiries work and their impact on your credit score is essential for making informed decisions throughout your homebuying journey.

What is a Credit Pull?

A credit pull, also known as a credit inquiry, occurs when a person or company requests access to your credit report. This report contains detailed information about your credit history, including your current and past credit accounts, payment history, and any public records such as bankruptcies or liens. Credit pulls are typically performed by lenders, creditors, and other entities to assess your creditworthiness and determine the risk associated with extending credit to you.

There are two main types of credit pulls: soft pulls and hard pulls. Each type serves a different purpose and has a distinct impact on your credit score.

Soft Credit Pulls

A soft credit pull, also referred to as a soft inquiry, is a type of credit check that does not affect your credit score. These inquiries are often performed without your explicit consent and are not linked to a specific application for new credit. Soft pulls are commonly used for background checks, pre-approved credit offers, and personal credit monitoring.

How Soft Pulls Work

When a soft pull is performed, the entity requesting your credit information receives a high-level overview of your credit profile. This overview typically includes your credit score, credit utilization, and any red flags such as late payments or collections. However, the soft pull does not reveal specific account details or the exact amounts owed on each account.

Soft pulls can occur in various scenarios, such as:

  • Pre-qualification offers: Mortgage lenders, credit card companies, and other financial institutions may use soft pulls to identify potential customers who meet their lending criteria. They can then extend pre-approved offers to these individuals without impacting their credit scores.
  • Employment background checks: Some employers may conduct soft pulls as part of their background screening process to assess a candidate's financial responsibility and stability.
  • Insurance quotes: Insurance companies may perform soft pulls to determine your risk profile and calculate your insurance premiums.
  • Personal credit monitoring: When you check your own credit score through a credit monitoring service or a free credit score provider, a soft pull is performed to retrieve your credit information.

The Impact of Soft Pulls on Your Credit Score

One of the most significant advantages of soft pulls is that they do not affect your credit score. Since these inquiries are not linked to a specific credit application, they are not considered indicative of increased credit risk. As a result, you can have multiple soft pulls performed without worrying about any negative impact on your credit standing.

This is particularly beneficial when you're shopping around for the best mortgage rates or exploring your credit options. You can authorize lenders to perform soft pulls to get a general idea of your creditworthiness and the mortgage products you may qualify for without hurting your credit score.

Hard Credit Pulls

In contrast to soft pulls, hard credit pulls, also known as hard inquiries, do have an impact on your credit score. These inquiries occur when you actively apply for new credit, such as a mortgage, car loan, or credit card. Hard pulls are visible to other lenders and creditors and can remain on your credit report for up to two years.

How Hard Pulls Work

When you submit an application for credit, the lender will request a hard pull of your credit report to assess your creditworthiness in detail. Unlike soft pulls, hard pulls provide the lender with a comprehensive view of your credit history, including specific account information, credit limits, and payment histories.

The lender uses this information to determine whether to approve your credit application and, if approved, to set the terms of your credit, such as the interest rate and credit limit. Hard pulls serve as a record of your active credit-seeking behavior and are considered by credit scoring models when calculating your credit score.

The Impact of Hard Pulls on Your Credit Score

Each hard pull can cause a small, temporary drop in your credit score, typically ranging from a few points to a maximum of 10 points. While a single hard pull is unlikely to have a significant impact on your credit standing, multiple hard pulls within a short period can compound and lead to a more noticeable decrease in your score.

This is why it's essential to be strategic when applying for credit. Submitting multiple credit applications within a short timeframe can give the impression that you are desperate for credit or are taking on more debt than you can handle, which can raise red flags for lenders and negatively impact your credit score.

However, it's important to note that credit scoring models do take into account the fact that consumers often shop around for the best rates when making major purchases, such as a mortgage. As a result, multiple hard pulls for the same type of credit within a specific timeframe (usually 14-45 days) are typically treated as a single inquiry, minimizing the impact on your credit score.

Soft Pulls vs. Hard Pulls in the Mortgage Process

Now that we've established the fundamental differences between soft and hard credit pulls, let's explore how they come into play during the mortgage process.

Pre-Qualification and Pre-Approval

When you're in the early stages of your homebuying journey, you may come across the terms "pre-qualification" and "pre-approval." While these terms are often used interchangeably, they refer to different stages of the mortgage process and involve different types of credit pulls.

Pre-qualification is a preliminary step that gives you a general idea of how much you might be able to borrow based on your self-reported financial information. During pre-qualification, the lender may perform a soft pull of your credit to get a high-level overview of your credit profile. This soft pull does not impact your credit score and is not visible to other lenders.

Pre-approval, on the other hand, is a more formal and in-depth process. When you apply for pre-approval, the lender will request a hard pull of your credit report to thoroughly assess your creditworthiness. This hard pull will be visible to other lenders and may have a small, temporary impact on your credit score.

The pre-approval process involves submitting a formal mortgage application, providing detailed documentation of your income, assets, and debts, and undergoing a rigorous credit evaluation. If approved, you'll receive a pre-approval letter indicating the maximum loan amount you qualify for, which can be a powerful tool when making offers on homes.

Rate Shopping and Multiple Hard Pulls

As mentioned earlier, when you're shopping around for the best mortgage rates, multiple hard pulls within a short timeframe are generally treated as a single inquiry by credit scoring models. This is known as "rate shopping."

Most credit scoring models recognize that rate shopping is a common and responsible practice among consumers. To accommodate this, they typically allow a grace period of 14-45 days (depending on the scoring model) during which multiple hard pulls for the same type of credit are counted as a single inquiry.

This means that you can apply for pre-approval with multiple lenders within this grace period without worrying about a significant negative impact on your credit score. However, it's still essential to be mindful of the number of hard pulls you authorize and to limit your applications to lenders you are genuinely considering.

The Importance of Credit Monitoring

Throughout the mortgage process, it's crucial to keep a close eye on your credit reports and scores. Regularly monitoring your credit can help you identify any errors, fraudulent activity, or areas for improvement that may impact your ability to secure favorable mortgage terms.

You are entitled to one free credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) every 12 months. Additionally, many credit card companies, banks, and credit monitoring services offer free access to your credit scores and reports.

By staying informed about your credit health, you can take proactive steps to address any issues and maintain a strong credit profile, which can ultimately help you navigate the mortgage process more smoothly.

HELOC Loan

A Home Equity Line of Credit (HELOC) is a revolving credit line secured by your home's equity. It works similarly to a credit card, allowing you to borrow funds as needed up to a certain limit. HELOCs can be particularly useful for homeowners looking to finance home improvements, consolidate debt, or cover other large expenses. Unlike a traditional mortgage, a HELOC provides flexibility in borrowing and repayment.

Benefits of a HELOC

  • Flexible Borrowing: Borrow as much or as little as you need, up to your credit limit.
  • Lower Interest Rates: Generally lower than credit cards and personal loans due to being secured by your home.
  • Interest-Only Payments: During the draw period, you may have the option to make interest-only payments, reducing your monthly obligations.

Impact on Credit Score

Applying for a HELOC involves a hard credit pull, which can temporarily lower your credit score. However, once approved, responsibly managing your HELOC can positively impact your credit by increasing your available credit and lowering your credit utilization ratio.

Loan Approval

Loan approval is a critical step in securing financing for a home purchase. It involves a thorough review of your financial health, including your credit score, income, employment history, and debt-to-income ratio. The process begins with a pre-qualification or pre-approval, followed by a full application and underwriting.

Factors Affecting Loan Approval

  • Credit Score: Higher scores generally lead to better terms and interest rates.
  • Income and Employment: Stable income and employment history are crucial.
  • Debt-to-Income Ratio: Lenders prefer a DTI ratio below 43%.

Preparing for Loan Approval

To increase your chances of approval, check your credit report for errors, pay down existing debt, avoid new credit inquiries, and

save for a down payment.

Home Equity Loan

A home equity loan allows you to borrow a lump sum of money against the equity in your home. Unlike a HELOC, a home equity loan provides a fixed amount that you repay over a set period with fixed monthly payments. This type of loan is ideal for large, one-time expenses such as home renovations, medical bills, or debt consolidation.

Benefits of a Home Equity Loan

  • Fixed Interest Rates: Predictable monthly payments and interest rates.
  • Lump Sum Payment: Receive a large amount of money upfront.
  • Potential Tax Benefits: Interest may be tax-deductible if used for home improvements.

Impact on Credit Score

Similar to a HELOC, applying for a home equity loan involves a hard credit pull. Responsible repayment of the loan can improve your credit score by demonstrating reliable payment behavior and increasing your available credit.

Mortgage Loan

A mortgage loan is a long-term loan used to finance the purchase of a home. It is typically repaid over 15 to 30 years with fixed or adjustable interest rates. Securing a mortgage involves a detailed application process, including credit checks, income verification, and property appraisal.

Types of Mortgage Loans

  • Conventional Loans: Not insured by the government, usually require a higher credit score.
  • FHA Loans: Insured by the Federal Housing Administration, designed for low-to-moderate income borrowers with lower credit scores.
  • VA Loans: Available to veterans and active-duty military members, offering favorable terms without requiring a down payment.

Preparing for a Mortgage Loan

Improve your credit score, save for a down payment, and gather necessary documents such as tax returns, pay stubs, and bank statements to streamline the application process.

Credit Line

A credit line, or line of credit, is a flexible loan that allows you to borrow up to a predetermined limit. Unlike traditional loans, a credit line gives you the flexibility to draw funds as needed and pay interest only on the borrowed amount. Lines of credit can be secured (backed by collateral, like a HELOC) or unsecured (based solely on creditworthiness).

Benefits of a Credit Line

  • Flexibility: Borrow as needed up to your limit.
  • Interest Savings: Pay interest only on the amount you borrow.
  • Reusability: As you repay, you can borrow again up to your limit.

Impact on Credit Score

Opening a line of credit involves a hard inquiry, which can lower your credit score temporarily. However, maintaining a low balance relative to your credit limit can improve your credit utilization ratio and positively impact your score.

Conclusion

Understanding the differences between soft and hard credit pulls is essential for navigating the homebuying process and managing your credit health. Additionally, knowing about various financing options such as HELOCs, home equity loans, mortgage loans, and credit lines can help you make informed decisions when purchasing or refinancing your home. By staying informed and proactive, you can effectively manage your credit and secure favorable terms for your mortgage and other loans.

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