I wrote a post about 5 Mistakes When Buying Your First Property that I personally made to give you insight into mistakes to avoid. The first area I messed up was in the amount of time it took me to secure my first deal the second was what type of property to invest. The below goes deeper into my 3rd mistake and offers ideas on how to avoid hurting your credit.
Too many credit checks… over the course of 15 months, I put in many offers and had 2 accepted contracts on properties that fell through during my due diligence period. In order to have a financing offer considered, I had to have a pre-approval letter which requires a credit check. I had been working with multiple mortgage brokers and companies 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. The mortgage brokers told me that having multiple pulls in a short amount of time wouldn’t matter if you got a mortgage. I don’t know if that is true or not, but because I had contracts that fell through it hurt me and did affect my credit.
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 and will thus get a better rate because you are at low risk of not paying. A bad credit score is the opposite meaning you are less likely to pay the loan back on time and will thus get a worse rate because you are at high risk of not paying.
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 my credit score, utilize these free resources as a guidepost with mortgage brokers and lenders. Don’t authorize them to do a credit check, but rather give them roughly what your credit score is based on the free credit monitoring tools and your financial picture based on your personal finance app to get a rough quote for different loan packages. Once the mortgage broker or lender has this information they should be able to generate some quotes for you and let you know what amount you would pre-qualify for a loan.
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, I will share my general credit & financial information with mortgage brokers and lenders to get competitive rates without authorizing credit pulls until I had selected the right mortgage package for me. Good luck as you search for your first investment property and avoid this simple mistake!