Truth behind “I Don’t Want My Credit Pulled Because It Will Lower My Credit Scores!”

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We have an office policy that ties a “Pre-Approval Letter” to “Property Tours”.  It states,

A Buyer “must” have a “Pre-Approval Letter” from a lender verified by us before we show them any properties. Lenders who are verified by us DO NOT give a “Pre-Approval Letter” without pulling your credit, W-2/1099 or last 2 yrs tax return.
We will show buyers properties with a “Pre-Approval Letter” that is less than 90 days old.
We will show buyers properties which are less than or equal to the amount in the “Pre-Approval Letter”.

So, I hear “I Don’t Want My Credit Pulled Because It Will Lower My Credit Scores!” on a fairly regular bases, when I tell a Borrower who is looking to be Pre-Approved for a mortgage that a lender needs to run their credit in order to Pre-Approve them.  The reason why a Borrower will give me this response is usually because of one of two reasons.

The first is because they have already talked to another Loan Originator who has told them to not let anyone else pull their credit, because it will lower their credit score.  Generally the reason why a Loan Originator would tell a Borrower this is because they want to eliminate the competition, so they will scare the Borrower by telling them this.

The truth is that if two Loan Originators pull a Borrower’s credit within 14 days of each other, it will only count as 1 credit pull, and has absolutely no impact on the Borrowers credit score.  In fact the Borrower’s credit can be pulled several times within that 14 day period, and it will only count as one credit pull.  Could the Borrower see a change in their credit score from one pull to the other?  Absolutely, but it will not be as a result of the credit pull, it will be because a Creditor has reported to the Credit Bureaus in between credit pulls.  Having said this, a Loan Originator maybe correct in advising a Borrower to not have their pulled if the Borrower is boarder line on being able to qualify for a mortgage.  But the Loan Originator should clearly explain why, and that the Borrower has the 14 day window to talk to competitors.

The second reason why I get the response “I Don’t Want My Credit Pulled Because It Will Lower My Credit Scores!” is because the Borrower knows that their credit is not good, and wants to see if they can get a Loan Originator to give them a Pre-Approval with out pulling their credit.  To do so is silly on the part of the Borrower and Loan Originator.  If the Borrower makes an offer on a property, and it is accepted, the Borrower’s credit will have to be pulled in order to submit a loan, and everything will fall apart at that point.  By the way Borrowers who don’t want to have their credit pull for this reason will ALWAYS tell me that they have great credit.

If a Borrower does not let a lender pull their credit, our conversation is a very short one.  A good lender will not consider even giving a Borrower a Pre-Qualification Letter based on looking at their credit later. If a Borrower does not let a lender pull their credit, they are wasting their Lender’s time, their Realtor’s time and their time.

There are two things that are an ABSOLUTE MUST when Pre-Approving a Borrower:

  • Running a Borrowers Credit Report, which will show their credit scores, and monthly revolving debt.
  • Looking at a Borrowers Income, so that Debt-To-Income Ratios can be established early on in the Pre-Approval process.

These two things are an ABSOLUTE MUST, anything short of this early on in the process is a waste of everyone’s time.

The 4 C’s of Mortgage Underwriting

I thought today might be a good time to review the basics of what lenders look for as they decide to approve (or deny) mortgage applications. For at least 25 years, I have heard them called “The 4 C’s of Underwriting”- Capacity, Credit, Cash, and Collateral.  Guidelines and risk tolerances change, but the core criteria do not.

CAPACITY

CAPACITY is the analysis of comparing a borrower’s income to their proposed debt. It considers the borrower’s ability to repay the mortgage. Lenders look at two calculations (we call ratios). The first is your Housing Ratio. It simply is the percentage of your proposed total mortgage payment (principal & interest, real estate taxes, homeowner’s insurance and, if applicable, flood insurance and mortgage insurance – like PMI or the FHA MIP) divided by your monthly, pre-tax income. A solid Housing Ratio (often called the front end ratio) would be 28% or less; although, at times loans are approved at a significantly higher number. That’s because your front end ratio is looked at in conjunction with your back end ratio.

The back end ratio (referred to as your Debt Ratio) starts with that mortgage payment calculation from the Housing Ratio and adds to it your recurring debts that would show up on your credit report (auto loans, student loans, minimum credit card payments, etc.) without taking into consideration some other debts (phone bills, utility bills, cable TV). A good back ratio would be 40% or less. However, loans sometimes are granted with higher debt ratios. Understand that every application is different. Income can be impacted by overtime, night differential, bonuses, job history, unreimbursed expenses, commission, as well as other factors. Similarly, how your debts are considered can vary. Consult an experienced loan officer to determine how the underwriter will calculate your numbers.

CREDIT

CREDIT is the statistical prediction of a borrower’s future payment likelihood. By reviewing the past factors (payment history, total debt compared to total available debt, the types of monies: revolving credit vs. installment debt outstanding) a credit score is assigned each borrower which reflects the anticipated repayment. The higher your score, the lower the risk to the lender which usually results in better loan terms for the borrower. Your loan officer will look to run your credit early on to see what challenges may (or may not) present themselves.

CASH

CASH is a review of your asset picture after you close. There are really two components – cash in the deal and cash in reserves. Simply put, the bigger your down payment (the more of your own money at risk) the stronger the loan application. At the same time, the more money you have in reserve after closing the less likely you are to default. Two borrowers with the same profile as far as income ratios and credit scores have different risk levels if one has $50,000 in the bank after closing and the other has $50. There is logic here. The source of your assets will be examined. Is it savings? Was it a gift? Was it a one-time settlement/lottery victory/bonus? Discuss how much money you have and its origins with your loan officer.

COLLATERAL

COLLATERAL refers to the appraisal of your home. It considers many factors – sales of comparable homes, location of the home, size of the home, condition of the home, cost to rebuild the home, and even rental income options. Understand the lender does not want to foreclose (they aren’t in the real estate business), but they do need to have something to secure the loan against, in case of default. In today’s market, appraisers tend to be conservative in their evaluations. Appraisals are really the only one of the 4 C’s that can’t be determined ahead of time in most cases.

Now, each of the 4 C’s are important, but it’s really the combination of them that is key. Strong income ratios and a large down payment with strong reserves can offset some credit issues. Similarly, long and strong credit histories help higher ratios….and good credit and income can overcome lesser down payments. Talk openly and freely with your loan officer. They are on your side, advocating for you and looking to structure your file as favorably as possible.