Enterprise Realtors Blog

The “Hard” and “Soft” of Credit and Your Mortgage

Ever wonder what a lender sees when they run a credit check? When a lender runs a credit check, the lender receives a report of your current credit usage, late payment history, and all accounts associated with your name. The lender will also receive a list of all of your “hard” credit inquiries, but “soft” credit inquiries will not be included in the report given to the lenders.  

What’s the difference between “hard” and “soft” credit inquiries?

“Hard” inquiries are those that originated with a lender or were for credit use (mobile phone, apartment lease, etc.). “The general rule is if it is an inquiry that indicates that you may be taking on additional financial obligations, because that could be meaningful to your risk of being able to repay other debts,” says Maxine Sweet, vice president of public education for Experian, one of the three major credit bureaus. “Hard inquiries” also cost you points on your credit score, which varies based on your credit history.

“Soft” inquiries are those that do not relate to a new financial commitment. Credit checks by an employer or pre-approved credit cards are both examples of “soft” inquiries. “Soft” inquiries do not cost you points.

Read more: How credit inquiries affect credit score

If “hard” inquiries affect my credit report negatively, then should I shop for the best mortgage package?

Before answering this question, it is important to understand how credit scoring models work. The two leading scoring models are VantageScore and FICO. VantageScore reports all similar inquiries occurring within a 14-day window as one inquiry, whereas FICO uses a 30-day model. Find out what your FICO score is now.

For the home buyer looking for the best mortgage package that means – yes, shop for the best mortgage package, but do it within a short time frame. Don’t spread your inquiries out over several months. Doing so will adversely affect your credit and affect your buying ability.

How does my credit score and down payment affect my loan?

            According to Josh Miller, loan officer with Paragon Bank, “When applying for a loan, there are three things that will aversely affect your loan: a low credit score, a high debt to income ration, and a high loan to value (percentage of appraised value being financed).”

Let’s consider these scenarios (each is based on the purchase of a $250,000 home) …

Scenario A:     Conventional Loan With 20% Down

Credit Score = 740: A home buyer can expect a low APR with no origination fees or points. This is considered the ideal situation, and one that Dave Ramsey advocates.

Credit Score = 680: A home buyer can expect to receive an APR that is at least an eighth higher than the individual with a 740 score. The buyer has the option of purchasing points that would lower the interest rate. One point is one percent of the purchase price of the house, which in this case would be $2500. If the buyer has the extra money to purchase the point and plans to stay in the house for more than 3-5 years, this is a good option.

Scenario B:      Conventional Loan with 5% Down

Credit Score = 740: A home buyer could get an interest rate as low as 4 ¾.

Credit Score = 680: As in Scenario A, individuals with a lower credit score will receive a higher interest rate.

When putting 5% down on a mortgage, Private Mortgage Insurance is required. In order to qualify for PMI, you must have a minimum 660 credit score and maximum of 41% debt/income ratio. In this scenario, PMI will cost the buyer $186 a month added to the loan payment.

Scenario C:      FHA Loan with 3 1/2 % Down

FHA loans are more forgiving of credit scores than conventional loans and therefore interest rates will likely not be affected by your score. FHA loans also require PMI. Buyers must pay an upfront premium ($2437.50 in the above scenario) and monthly premium ($223.44 added to loan payment). 

            Carol McConkey, Senior Vice President and Senior Consumer Banking Officer at Paragon Bank, stated that “The climate of home buying is changing. Rates will start to rise later this year and people will likely start staying in their homes longer than 7-10 years. This will affect the rate at which people refinance their homes, which some people are doing back to back right now. Since so many people are tight on cash, the FHA loan with little money down is the best choice for many and with the interest rates being so low now is a good time to buy.”

Want more resources:

Click here for a Mortgage Calculator.

Check out Dave Ramsey’s Checklist for buying a house here.

Contact McConkey or Miller at Paragon bank with your mortgage questions. (carol.mcconkey@bankparagon.com or josh.miller@bankparagon.com)

This post was written by

JonMoultrie – who has written 35 posts on Enterprise Realtors Blog.

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Tags: Arlington Tennessee Real Estate, How Credit affects Credit Score, Shopping Lenders