Credit Inquiry

What is a Credit Inquiry?

A credit inquiry is a request made by a lender or other authorized party to view your credit report. This action is recorded on your credit report and can influence your credit score. Lenders use credit inquiries to assess your financial reliability and determine the risk associated with lending you money, which is crucial for real estate investments like obtaining a mortgage.

Types of Credit Inquiries

Not all credit inquiries are the same. They are generally categorized into two main types, each with a different impact on your credit score.

Hard Inquiries

A hard inquiry, also known as a "hard pull," occurs when a lender checks your credit report to make a lending decision. This happens when you apply for new credit, such as a mortgage, car loan, or credit card. Hard inquiries can temporarily lower your credit score by a few points and remain on your credit report for up to two years, though their impact typically fades after a few months. Multiple hard inquiries in a short period can signal to lenders that you are a higher risk.

Soft Inquiries

A soft inquiry, or "soft pull," occurs when your credit report is checked without you applying for new credit. Examples include checking your own credit score, pre-approvals for credit card offers, or background checks by employers. Soft inquiries do not affect your credit score and are not visible to other lenders. They are a good way to monitor your credit health without any negative consequences.

How Credit Inquiries Affect Your Score

Hard inquiries typically cause a small, temporary dip in your credit score, usually 1-5 points. The impact is generally minor and short-lived. However, if you have many hard inquiries from different types of lenders within a short timeframe, it can suggest you are taking on too much debt, which could lead to a more significant score reduction. For mortgage or auto loans, credit scoring models like FICO often treat multiple inquiries within a specific shopping period (usually 14-45 days) as a single inquiry, recognizing that consumers shop for the best rates.

Real Estate Example: Applying for a Mortgage

Imagine you are looking to purchase an investment property for $300,000 and need a mortgage. Here’s how credit inquiries might play out:

1. Step 1: You decide to get pre-approved by Lender A. This results in a soft inquiry, which does not affect your credit score.
2. Step 2: You find a property and apply for a mortgage with Lender A. This triggers a hard inquiry, potentially lowering your score by a few points.
3. Step 3: To compare rates, you apply with Lender B and Lender C within a 30-day window. These also result in hard inquiries. However, because they are for the same type of loan (a mortgage) and within the typical shopping period, credit scoring models will likely count them as a single inquiry, minimizing the impact on your score.
4. Step 4: If you then apply for a new credit card from a different company outside this shopping window, that would be another separate hard inquiry, potentially causing an additional small score drop.