Credit score, soft search, hard search... What are they and how do they affect you?
I have had many conversations and questions around credit checks during my time as a mortgage broker, such as, 'please only run a soft footprint or what is the difference between a soft and hard footprint'?
I have put together a bit of information on the difference and what outcome this can have on the mortgage application.
When applying for credit, the mortgage lender or creditor (lender) will ask a credit bureau to look at your credit report, that enquiry may get noted as part of your credit history. There are two types of enquiries - hard and soft, so what are the differences and how will this effect your credit report and mortgage application?
A hard enquiry occurs when a mortgage lender or creditor with whom you've applied for credit reviews your credit report as part of their decision-making process. This type of enquiry appears on your credit report and can influence your credit scores.
A soft enquiry occurs in cases where you check your own credit or when a mortgage lender or creditor (lender) checks your credit to pre-approve you for an offer. Soft enquiries do not appear on your credit report for other mortgage lenders or creditors to see and do not impact your credit scores.
If you apply for credit, such as a mortgage, car loan (lease) or credit card, the lender (with your permission) will check your credit report and credit score from one or more of the major credit bureaus. Because these enquiries are tied to an actual credit application, they're considered hard enquiries, and they can affect your credit scores. However, when you are looking at the mortgage side of things, some mortgage lenders will only run a hard search at full application, with the agreement in principle being a soft search. But on the flip side, some lenders will also run the hard print on the agreement in principle as well.
How Hard Enquiries Impact Your Credit Scores
Too many hard enquiries in a short period of time can be concerning to lenders. That's because multiple hard enquiries may add up to numerous new accounts and a potential amount of borrowing on a credit facility. Opening various new credit accounts may mean you're having trouble paying bills or are at risk of overspending. As a result, hard enquiries have a temporary, negative effect on your credit scores.
Some credit scoring models that mortgage lenders and creditors (lenders) use does consider the possibility that you're rate shopping for the best deal available. Most will consider multiple enquiries for a certain kind of credit product, such as a mortgage or car loan, in a short period as a single enquiry, which will have a smaller impact on your credit score than multiple, separate enquiries. However, many hard footprints will have a negative impact on your credit score and could lead to issues when trying to gain a mortgage or credit facility.
Enquiries (credit checks) are only one of many factors used in calculating your credit score. Other factors include the following; your payment history, credit utilisation ratio, the mix of credit facilities and how long you've been using credit have a more substantial impact on your credit score. Hard enquiries are rarely the reason you might be declined for a mortgage or credit, but it does play a part in the overall score.
Mortgage companies and credit lenders will also have their own internal scoring system which the credit report plays a part in but not the whole factor of deciding whether to lend or not.
How Long Enquiries Stay on Your Credit Report
Hard enquiries remain on your credit report for just over two years (give or take), but their impact on your credit lessens over time. Even if you have multiple hard enquiries in a span of just a few months, it's still unlikely a potential lender will give them too much weight. Your history of on-time payments and a low credit utilisation ratio are much more important to most credit scoring models and the lenders that use them.
You can't have an accurate hard enquiry removed from your credit report, but if a company pulled your credit in error or without your permission, you can ask the credit bureau to remove the enquiry from your file but this will need to be confirmed with the lender that performed the search.
What is a soft search then?
Well when you check your own credit report or give permission to someone like a potential employer to review your credit report, a soft enquiry occurs. Soft enquiries may also occur when businesses, such as lenders, insurance companies, or credit card companies, check your credit to pre-approve you for offers, such as an agreement in principle or even when running a comparison site for your next car insurance or what credit card you will be accepted for.
Because soft enquiries aren't linked to a specific application for new credit, they're only visible on your credit report to you with a couple of exceptions, such as insurance companies may be able to see other insurance companies and enquiries by debt settlement companies you have authorised to access your report may be shared with your current creditors. These have no effect on your credit score as they are never considered as a factor in credit scoring models. Potential lenders won't be able to see them and soft enquiries are never considered as a factor in credit scoring models.
Gaining an agreement in principle
So, with the above information should you go to every bank, building society yourself or even go on a comparison site to gain your agreement in principle, rather than speaking to a mortgage broker?
Of course, I am going to say no, as I am a mortgage broker but this is also because of many other factors;
When running the agreement in principle it’s not just about the soft or hard footprint, it’s also about your situation as my client. For example, are you looking to stretch your income to buy that dream home or get your first foot on the property ladder, you may be self-employed with only 1 year’s account or a huge increase from the year before or there may be issues with your credit report. So, it’s not always about the lender that leaves a soft footprint, the lender with the best rate or who gives you the best affordability.
This is why as a potential borrower you shouldn’t worry about a hard or soft footprint on your credit file, as when you speak to a mortgage broker who looks at your situation and criteria they will be the best person to place the mortgage with the correct lender.
My advice to clients always remains the same, gain the agreement in principle on what is best for your current situation and when you find a property if your situation has changed then we review the mortgage lender at that time again.
So, to sum up, the above, a credit search for an agreement in principle (hard or soft), with the potential change of lender if your circumstances were to change, would only cause 3 credit searches and this would not be an issue for your file. However, speaking to multiple lenders or mortgage brokers that may all run credit checks, for them all to be potentially hard footprints as well, could cause an issue.
My advice is 3 or 4 hard footprints within a space of 6 months will not affect gaining a mortgage.
But what will affect you is trying to place the case with the wrong lender and having to run more than the above stated.
A very big factor to the above though, always make sure you are aware of what is on your credit file and provide a copy to the mortgage broker to review before placing the case.
We can not place a case with the correct lender if we are not aware of any potential issues that could be on your credit file.
Here are a few websites to where you can gain access to your credit report;
The top two are subscription services but the main ones that lenders use.