A credit inquiry is when an individual or a business requests a credit report from one or all of the three main credit repositories. These repositories are Experian, Equifax and TransUnion and all three use the very same algorithm when calculating the crucial credit scores.
For most mortgage loan programs, a minimum credit score is required. There are five factors that go into calculating these three digit FICO scores and they are someone’s payment history, account balances, types of credit, how long someone has used credit and requests for new credit, referred to as an inquiry.
There are two primary types of inquiries, a hard and a soft inquiry. A hard inquiry will have a direct and almost immediate impact on credit scores whereas a soft inquiry will not. A hard inquiry is one where the individual has made a direct request for new credit. The request can be for a new automobile loan, installment loan or a credit card. A single, somewhat isolated request for new credit will have a marginal impact on credit scores.
However, multiple requests for credit during a compressed period of time will eventually harm scores. The thinking is that immediate and several requests for new credit could indicate the individual is currently or soon will be in some sort of financial straits and the new credit accounts could act as a cushion until the financial issues are resolved. These varied, multiple requests can keep companies from issuing new credit.
A soft inquiry is relatively benign. A soft inquiry won’t affect scores at all. A soft inquiry is when someone requests their own credit report for an annual review. A soft inquiry can be made by a potential employer. A soft inquiry can also be made by a company seeing if someone is eligible to apply for their credit card. None of these scenarios will hurt scores. Unfortunately, consumers might do a bit of basic research and see that multiple inquiries during a short period of time will hurt scores when that’s not always the case.
Let’s take a look at someone who’s applied for a new home loan. The application is submitted but after a few days the applicant gets a little worried. There’s been no documentation sent, no phone calls returned and a vacant loan officer. After two weeks the applicant thinks it might be a good idea to apply for a mortgage at another lender but decides not to because an additional inquiry will drive scores down even further. But that thinking is wrong, especially for something as important as a mortgage.
The guidelines set forth by the Consumer Financial Protection Bureau, or CFPB, have ruled that multiple requests for the same type of account within a 45 day period count as just one inquiry. That’s the key phrase here, “…same type of account.” The applicant with the non-responsive loan officer makes another application with a new company after two weeks and there is no effect on scores. Remember, same type of account and 45 days.