The Truth About Credit Pulls

When looking to purchase a home, one of the scariest things is to have your credit report pulled and reviewed, and it makes some clients uneasy! However, we must pull the credit reports as part of the mortgage application process to assess and review an individual's creditworthiness,  to determine what type of loan you qualify for, and the terms of the loan.

 Here are a few reasons why mortgage companies pull credit:

Risk Assessment-

When mortgage lenders loan a client thousands of dollars, they want to ensure they are likely to be paid back. Unfortunately, determining what may happen financially for a client over the next 15 - 30 years is complex. Still, the credit report accurately estimates whether a borrower has positively maintained their credit. By reviewing credit reports, they can assess an individual's credit history, including their payment patterns, outstanding debts, and any negative information (such as late payments or defaults). This helps the lender determine the likelihood of the borrower repaying the loan timely.

Loan Eligibility-

Every mortgage loan has a minimum requirement regarding credit factors. The loan originator reviews the client's credit bureau to ensure they meet the requirements for the mortgage loan which they are applying for. A loan originator considers credit scores and credit history to determine whether or not an individual meets the minimum requirements. Borrowers with higher credit scores are more likely to have better chances of qualifying for a mortgage and securing more favorable terms, such as lower interest rates or down payment options.

Our team offers various mortgage loans including FHA, USDA, VA, and Conventional mortgage loan products. These mortgage loans all have different credit score requirements; generally, we want a 580 or higher credit score.

Interest Rates and Loan Terms-

Credit scores play a significant role in determining the interest rate a borrower will receive. Lenders use credit information to assess the level of risk associated with a borrower, and individuals with higher credit scores may be offered lower interest rates. A lower interest rate can result in significant savings over the life of the loan. Additionally, credit history can influence other loan terms, such as the length of the loan or the required down payment.

The act of pulling a credit report itself can have a minor, short-term impact on an individual's credit score. However, when a lender requests a copy of the credit report, it is recorded as a "hard inquiry" on the credit file. Hard inquiries typically have a small negative effect on credit scores (a few points or less), and credit scoring models are designed to distinguish between rate shopping (looking for the best mortgage rate) and multiple credit applications.

Credit inquiries made within a short period of time (usually within 30 days) for mortgage-related purposes are treated as a single inquiry. This allows borrowers to shop around and apply to multiple lenders without significantly damaging their credit scores.