Prospective homebuyers often get a crash course in credit scores. One of the earliest lessons is that consumers can experience two types of credit inquiries, soft and hard. It’s important to know the difference, because one can have implications for your credit score, not to mention your ability to land a VA home loan.
The major distinction between them is that only one -- hard inquiries -- can result in new debt and impact your credit score. You’ll need to give a mortgage lender permission to conduct a hard credit inquiry when the time comes to seek VA loan prequalification and preapproval.
And that often leaves borrowers with an important question: How will hard credit inquiries affect my ability to comparison shop among different mortgage lenders?
Let’s take a closer look.
Soft Credit Inquiries
Generally, a soft credit inquiry is a credit check that doesn’t impact your credit score or lead to new credit obligations. You’re not applying for credit with a soft inquiry.
One of the most common soft inquiries is when consumers check their own credit reports. Obtaining copies of your credit reports from Annual Credit Report.com or monitoring your score via applications and websites typically won’t ding your credit score.
Other soft credit inquiries can include:
- Credit card companies checking your credit to send you preapproved credit card offers
- Employers conducting background checks
- Insurance companies and other firms that want to offer products, goods or services
Third parties can conduct a soft inquiry without your knowledge, let alone your permission. Soft credit pulls may show up on your credit report, but they’re not playing a role in your overall credit score.
Hard Credit Inquiries
On the other hand, hard credit pulls can affect your credit score. Consumers must give permission for a hard credit inquiry while actively seeking new credit.
Hard credit pulls can stem from:
- Mortgage applications
- Automobile financing requests
- Credit card applications
- Retail credit applications
Not every hard pull will hurt your score, and it’s typically only a few points when it does. But those few points can make a big difference for buyers on the margins. That’s a big reason why it’s important to avoid applying for new credit once you’ve started the VA loan process.
Hard pulls can remain on your credit report for up to two years. They won’t ding your score the entire time, but they do show potential creditors your recent history of seeking new credit.
Creditors and credit scoring formulas may view a bunch of hard inquiries as a red flag. Consumers who seek or obtain a lot of credit often represent a greater risk in the eyes of lenders.
Getting a clear look at rates and estimated home loan costs from multiple mortgage lenders can help borrowers get the best deal possible. For prospective homebuyers, the potential effects of hard credit inquiries would seem to discourage comparison shopping, right? You don’t want to see your credit score tank after having three or four lenders pull your credit.
But that’s not actually what happens.
To help spur comparison shopping, the credit bureaus don’t count every hard pull against you when you’re seeking mortgage preapproval from multiple lenders. Instead, the bureaus will treat every mortgage lender inquiry within a given time span -- often 30 or 45 days -- as a single hard credit pull.
That ensures borrowers don’t take a massive credit score hit after seeking preapproval from three or four lenders.
Hard v. Soft Gray Areas
There are also times when the line between hard v. soft inquiry isn’t clear-cut.
Some of the potential gray areas include:
- Cell phone contracts
- Establishing utilities in a home or rental
- Apartment and home rental applications
- Setting up a bank account
- Renting a car
To be on the safe side, you can always ask whether the credit inquiry will be hard or soft.
Talk with a Veterans United loan officer if you have questions about credit guidelines.