Hard Inquiries = Not That Big of a Deal
We still have borrowers who panic when we need to pull their credit with a “hard credit inquiry.”
So here are a few quick reminders about hard inquiries.
Multiple inquiries for mortgage financing over a 30-to-45-day period (depending on the scoring model) only count as one inquiry. Most people know this, but it bears repeating.
Inquiries only count for about 10% of one’s credit score.
Inquiries only impact a credit score for one year, and that impact diminishes over time, even in the first year.
The impact of an inquiry for someone with a high credit score is minimal in any case – maybe a point or two at most.
And per Experian, “one or two hard inquiries accrued during the normal course of applying for loans or credit cards can have an almost negligible effect on your credit.”
Soft Pulls Are Not The Answer
A hard credit pull or inquiry is when a lender checks a borrower’s credit in response to an application for additional credit. A soft pull is when an entity just wants to see someone’s credit standing for some other reason – other than a credit application. A background check is a great example.
Hard pulls result in inquiries that can impact credit scores for up to a year. Soft pulls do not result in inquiries, nor do they impact credit.
At one point, lenders were able to offer soft pulls as an alternative for some borrowers who were overly concerned about the credit impact from hard pulls.
But, when the credit bureaus realized that lenders were starting to use soft pulls more and more, they made them cost-prohibitive because the bureaus make more money from hard pulls.
To offer a soft pull now, lenders would need to charge borrowers up front to cover the excessive cost – and most lenders prefer not to charge anything during the pre-approval process.
But once again, hard pulls are not that serious or risky anyway for the reasons set out above.
ARM Data
I saw this Adjustable-Rate Mortgage data on X, and I thought it was interesting. In 2005, almost 37% of mortgages were ARMs. In 2021, when fixed rates were at all-time lows, ARMs were just over 3% of mortgages. And currently ARMs comprise about 7% of all mortgages – and those are mostly jumbo loans.
ARMs were very attractive prior to 2008, IF they were offered by honest loan officers – with reasonable “margins.” Margins were what were added on to the interest rate index (LIBOR, T-Bill, etc.) to come up with the actual rate for the borrower. Slimy loan officers would lie about the margins and also quote the temporary start rate as if it were the permanent rate. Borrowers were then in for a huge shock when their rates adjusted up 5%. Making matters worse, many of those ARMs had massive prepayment penalties that borrowers did not understand – so they could not refi out of their ARMs without an enormous cost. And that is how ARMs (and mortgage brokers) got a bad name.
