Debunking the Mortgage Credit Check Myth

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The mortgage credit check myth is one that mortgage brokers, loan officers, and real estate agents often spout. You’ll hear it repeated over and over from friends and family. It can potentially make a difference in whether you receive a better interest rate or not.

So what myth am I talking about exactly?

Before I debunk this myth, this article is part of a series on the 5 Mistakes to Avoid When Buying Your First Property. This is the third article diving deeper into each of those 5 mistakes. The first area I messed up was when to buy real estate and the time it took me to secure my first deal. Second, was 2nd mistake deciding location and type of property.

The Mortgage Credit Check Myth

What is the mortgage credit check myth exactly? The myth is quite simple. It is okay to have a lot of credit checks when you are buying a house. They won’t all count against you when your loan closes.

This simply isn’t the case. Every time a hard credit check is done it shows up on your credit report regardless of whether you get a mortgage or not. Lenders take notice. Now, this doesn’t seem like too big of a deal right? If you only buy one house and go to one mortgage broker no big deal. Wrong. When buying property the financing can make or break a deal. A few loan points and a higher interest rate may be more detrimental.

Additionally, hard credit checks typically stay on your credit report for 2 years. Those extra checks can add up negatively affecting your score.

How do you know credit checks for mortgages can hurt your credit score?

I know this because I had it happen to me. Over the course of 15 months searching for my first investment property, I made this mistake. I listened to the “advice” from the folks selling me a product. On the whole, I like mortgage brokers but you shouldn’t unquestioningly take advice from the party trying to sell you a product.

What happened to me is that I put in many offers during those 15 months. I had two accepted contracts on properties but both fell through during my due diligence period. In order to have a financing offer considered by the seller, you have to provide a pre-approval letter. Since I was financing, I had to have a pre-approval letter. This required a credit check. What I didn’t know at the time was there is a difference between pre-qualification and pre-approval which no one tells you about. More to come on that later.

To get the best deal I had been working with multiple mortgage brokers in order to find a competitive rate. But I made the mistake of allowing each of them to pull my credit separately. Resulting in a large number of inquiries on my credit report in a short amount of time. The mortgage brokers told me that having multiple pulls in a short amount of time wouldn’t matter if you got a mortgage. Those contracts fell through and it ultimately negatively affected my credit. Don’t let the mortgage credit check myth fool you!

Credit Score Basics

Your credit score is important as it helps lenders asses how risky it is to lend you money and affects the interest rate they give you. If you have a good score you are more likely to pay the loan back on time. Thus you will get a better rate because you are at a low risk of not paying. A bad credit score is the opposite meaning you are more likely to not pay the loan back on time. Thus you will get a worse rate because you are at high risk of not paying.

Financial Glass - Mortgage Credit Check - Amex Card

What do you do instead?

In order to accurately get an estimate on the cost of a loan, potential lenders want your credit history. Luckily there are plenty of free tools from Credit Karma to just about every bank or financial institution offering free credit monitoring that makes it easy to know roughly what your score is.

Additionally, I would consider using a free finance monitoring app such as Mint or Personal Capital to keep track of how much money you have in the bank, your debt, and spending. This will give you a more accurate representation of your finances as you go explore lending options.

To avoid my mistake of having way too many credit checks and thus hurting your credit score, utilize these free resources as a guidepost with mortgage brokers and lenders. Don’t authorize them to do a credit check right off the bat. First, give them roughly what your credit score is based on the free credit monitoring tools. Provide your broad strokes financial picture based on your personal finance app. This should allow you to get a rough quote for different loan packages. Once multiple mortgage brokers and lenders provide you with this information you’ll know what amount you would pre-qualify for a loan without hurting your credit!

Pre-approved vs Pre-qualified

The slight difference between pre-qualification and pre-approval is a credit check. Most of the time you can get away with a pre-qualification letter. Now be sure not to fib or omit information when you are obtaining a pre-qualification or pre-approval letter. It will only cause you more harm in the end. The lender will go to verify all of the information you provided which you’ll want to match up accurately. Otherwise, you could be in hot water if a seller accepts your offer, but you don’t have the financing to complete the purchase.

Financial Glass - Retur on Investment

Why do I even need to get pre-qualified?

The pre-qualification is important as many real estate brokers/agents will want to know you are a qualified buyer. Plus sellers will want to ensure that you are able to actually produce the funds to purchase their property so having it at the time of your offer is important. At some point, you will need to get a formal pre-qualification letter but I believe it is best to have an idea of which lender will likely give you the best rates and mortgage package from your preliminary research.

In the future, be sure to only share your general credit & financial information with mortgage brokers and lenders when it is necessary. Ensure you shop around getting competitive rates without authorizing credit pulls. Wait until you have selected the right mortgage package before authorizing that final credit check. Good luck as you search for your first or next property and avoid this simple mistake!

Original post 5 Mistakes When Buying Your First Property
1st Mistake – When is the Best Time to Buy Real Estate?
2nd Mistake – Where Should you Buy Property?

4th Mistake – Know Your Numbers!

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