By Brett Seal
Soft Credit Pulls: How they Impact a "Pre-Approval"
There could be a novel written about Credit Inquiries and their impact on credit and financing, how many can you have, for how long, and when do they impact your score, etc. I am not a novelist, but I am going to give some quick insight on Soft Credit Pulls and how they can or cannot be used for a mortgage pre-approval.
I have seen more and more references to Soft Credit Pulls in our industry recently, including a few gigantic lenders in every segment promoting them. Essentially, the pitch is a soft credit inquiry does not impact your credit score and the lender will be able to pre-qualify you, or even PRE-APPROVE you without a hard credit inquiry, which is the kind that does MINIMAL impact to a credit score.
Soft credit pulls have been a thing for a very long time, so why now are we seeing it more? I can say with almost certainty it’s not really because those promoting it are concerned with a hard credit inquiry. If someone is serious about buying a home a hard credit inquiry is inevitable, it is going to happen. There are likely several reasons, but I believe there are two main reasons.
First, soft credit pulls are cheaper. They are about 25% of the cost of a credit report pulled with a hard inquiry when I shopped them. It is no surprise that mortgage volume is down. Refinances are basically nonexistent. Many companies are looking for ways to cut costs and when you are looking at a gigantic bill every month on hard credit inquiries it is a quick and easy way to cut that cost down.
Second, soft credit pulls do not create trigger leads. If you do not know what a trigger lead is, I will explain, and it is kind of unbelievable that someone’s information can be used like this. Basically, the bureaus know when you have a credit inquiry for a specific industry, i.e., mortgages. When you have a hard credit inquiry for a mortgage, that person’s contact information is sold to other mortgage companies as trigger leads because they know that the person is likely looking for a mortgage. For the next several months you get calls, texts, and emails to the point of it being relentless. It seems like it has gotten worse lately because, again with the lower volume, companies are trying anything they can to find business. (Note: we do NOT purchase trigger leads) To avoid that competition early in the loan process, some companies will use soft credit pulls and will not complete a hard credit pull until they absolutely do not have a choice.
Now that I have completely bored you with a ‘little’ insight into what they are and why companies may choose to use them, I will bore you some more with how soft pulls impact being pre-qualified or pre-approved for a mortgage. (Another topic that could have a novel - the difference or non-difference between pre-quals and pre-approvals, but that’s for another day) Regardless of the term used, because they are certainly misused in our business, let’s just settle on the intent of the PQ/PA process which is to know if and what a buyer can qualify for when it comes to a mortgage. Can you know for sure if you qualify for a mortgage when using a soft credit pull? In my opinion, NO.
The first issue is that soft pull credit reports cannot be reissued. Without going into a ton of detail about what that means, in short, you can’t really run AUS. You need to reissue a report to run AUS. I am sure a lot of people in this business will say “I know when it will be an AUS approve” and sometimes that is likely true. Here is the thing though, you do not ALWAYS know. I have run AUS almost a billion times and there have been many where I say, ‘how is this not getting AUS approved’. AUS can also help catch oversights in reading credit reports that impact eligibility. (Skimming a credit report is just natural in this business) I am being overly specific too early, but nobody knows when LPA will error for excessive authorized user accounts and there are times where LPA is your only option! Nobody knows when LPA or DU will have an issue with a disputed account! If you do not know what any of that even means, it's ok, just know that AUS is not always as straight forward as one would think, regardless of your experience level. To know with the level of certainty we need that a buyer can qualify you need to be able to run AUS. I will give some more examples below, but first, the second issue with soft pulls.
When that inevitable time comes where you are going to need a hard inquiry, it is a brand-new pull. If something changed in someone’s credit profile between the soft and hard inquiry, it is going to show up. Increased credit card balances, a new late payment, a lower score (or higher), anything. And as far as I know, it is not simply an upgrade to the report. I checked with 5 major companies that provide soft pulls and all advised that the subsequent hard pull is a brand-new report. Some will argue that you may have to re-pull a hard inquiry as well, and that is true, but you likely will not need another hard pull. For almost all programs, a hard pull report is good for 120 days from closing. I could go 100 days +/- without having to consider another pull which means for about 100 days I know that report is not going to change on me. That is the certainty I am looking for when I tell a buyer what they can buy for.
The last issue I want to bring up is a single bureau pull. This is where someone only checks one credit bureau. The cheapest and most inconclusive credit pull someone can possibly do is a single bureau soft credit pull. The issues this causes with pricing aside, because there is a huge issue with pricing someone’s mortgage on a single pull, is that you cannot tell someone that they can qualify for a mortgage with a single pull. You do not know a middle credit score with a single pull. The middle score is a big piece of the foundation of pricing and placing a buyer into a specific program. It is not uncommon to see a high bureau of 680 with a mid of 640, for example, which is significantly different approaches to financing. If you single pull the high, you are in a bad spot come time for the full report. There is also information that can be reported to one bureau and not another, most commonly from what I have seen is with collections and charge offs. They have significant impacts on scores but specifically with collections on FHA loans, can have a significant impact on DTI. If you single pull a bureau missing this data, you are in a terrible spot come time for the full report.
So, in short, and I know you are wishing I started with the short, if you are a buyer, a realtor, or even working at a mortgage company, and you see or hear references to a soft pull, just be aware of how that impacts your purchase or your business. I believe that when a buyer is pre-approved or pre-qualified you want as much certainty as possible; that your word is solid. I get that there are always variables and there are always unknowns, but the goal is to do everything possible to limit those possibilities. A hard credit pull is inevitable if someone is going to buy a home, it is going to happen one way or another, and honestly it is not a big deal. Get that certainty early in the process so that those variables and unknowns can be mitigated as much as possible. Someone may think they know but they never really know how AUS will read a loan.
Now, some more in-depth boring detail, so if you can’t take me anymore feel free to stop reading. I referenced earlier that I could provide some examples of AUS findings where I am like, 'what is going on here?'. This likely makes more sense to someone in mortgages, but if you are not in mortgages and you want to read, have at it. The reason a soft pull is even relevant is that in these examples, running AUS made all the difference, and with a soft pull you cannot reissue the credit report through AUS.
I have seen endless matrices from mortgage companies (including my own) that go something like this
Conventional loans – minimum credit 620 – max ltv 97 – max dti 45-50
And while that is technically not untrue it is also shortchanging the reality of loans. It should probably read something like this (exception manual underwrites – but like many things that is a whole other novel)
Conventional loans – min credit PER AUS – max ltv PER AUS – max dti PER AUS
Sure, the 620 / 97 / 50 (or 50.49 LPA) are non-negotiables, but they are also not applicable in every case. Here is my example:
Credit – 747, LTV - 95%. I need to use LPA because I need a 12-month average on self-employed buyers over 5 years. I would have bet money that LPA would take this up to 50.49%. In my younger years, I wouldn’t have even run LPA.
Boom, no deal. If I didn’t run AUS or if I soft pull and rely on a 3rd party algorithm, I am out a buyer and likely a relationship with a realtor. I can get 45.49 approved, and pre-approved accordingly, but no luck up to 50.
Credit reports are redundant. When you look at a bunch, they start to look the same. They also provide a ton of data in a compressed format so if you have never looked at one before it’s like reading a foreign language. Whether you have looked at one or a million, AUS will help you catch oversights and any little help to avoid the risk of error I will take.
VA loans are unique in that technically on an AUS approve loan (excluding manuals again), there is no DTI limit. It is based on residual income which is basically the amount of money someone has left over each month after expenses while also considering family size and geographic location. (Residual is another novel, I have a lot of writing to do)
Recently, I reviewed a VA loan for pre-approval, and I honestly could not understand for the life of me why we were Referring. 688 credit, 100% financing, DTI over 50% but we had the residual.
Why?? No big deal we will just drop the purchase price.
OK keep dropping
Again, in my younger years, I would probably have assumed we were good and never made the first run. I was genuinely confused at this point, so I did what I should have done 3 hours prior and READ MY AUS FINDINGS.
This is a first-time buyer; how do they have mortgage lates in the last 12 months? This is how, and everyone overlooked it.
There was a timeshare reporting as a mortgage with lates. On conventional loans, there are ways to ignore this in DU specifically, but not in government loans. Fortunately, we did not pre-maturely issue a pre-approval. We were also able to get pre-approval as a manual underwriting. But, if I had not learned from years of mistakes, I would have completely missed this and told this buyer they could qualify for way more than could be approved. AUS saved me. This is also a great example of the dangers of single pulls because you can see on the right that this was not reporting to TransUnion.
Most people will not know this until it hits them in the face, and when it does it hurt, but even asset type can impact AUS eligibility, specifically FHA loans and gift funds. I know this now and adjust accordingly, but let’s pretend I didn’t. I am reviewing a loan for pre-approval and the asset is listing like this.
Showing a gift as a checking account, what difference does it make, approve/eligible, moving on. Later in the loan process, the asset type is updated to reflect correctly as a gift, listed in source of down payment, and AUS now reads it as the gift it is.
And that is that we would have had to figure out another way to obtain approval. Whether it is finding a different asset, reserves, increase down payment, decrease DTI, etc. These are things that we would want to address before someone goes into contract. If you do not have the ability to run AUS, you do not know if a gift will impact eligibility.