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Can I Check My Credit Score Without Hurting It? Yes, But….

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Not All Credit Checks Are Created Equal! Protect Your Credit Score

Here’s How to Check Your Credit Without Hurting It

Did you know that too many credit checks can lower your overall credit score? If you’re applying for a phone, a mortgage or an apartment, there are a few things you can do to protect your credit in the process.

Hard & Soft Credit Checks

The first thing to understand is that not all credit checks are created equal. There are “hard” and “soft” credit checks. A “hard” credit check affects your score negatively, docking somewhere around 5 points from your overall score (with Equifax, for example). The more “hard” credit checks you do in a small time-window, the bigger the amount of penalty points. The idea is that someone who does lots of credit applications in a short time is desperate for credit. As a result, you are penalized for too many hits to your credit in a short time. The credit rating agencies do not care that you may be shopping around for a mortgage. Because they don’t take this into consideration, you need to avoid to many “hard” hits to your credit score.

“Soft” credit checks, on the other hand, do not affect your score.

How can you know the difference?

Most third-party credit checks are “hard”. This means, when a landlord pulls your credit it will affect your score. Same thing for a credit card-, cellphone-, or mortgage application. If you sign a consent form for a third-party to check your credit, most likely it will have a negative impact on your score.

Some third-party systems are able to do “soft” credit checks, but the information provided in these checks is less thorough. This is why most companies prefer “hard” checks. Also, most lenders, landlords and phone company employees have no idea how the credit checking system actually works. They simply don’t know what their checking up on you is having a negative effect on your rating.

So, how can you be sure what type of check is being run?

How Can You Protect Yourself & Your Credit?

  • Make sure you ask the third-party to provide some kind of documentation or guarantee as to what type of check they’re running (hard or soft). If they’re running a hard check, they should be able to tell you how many points you’ll lose as a result.
  • If you’re shopping around for a mortgage, loan or apartment, make sure you get the landlord, banker or broker to tell you at what point they will hit your credit. Lenders can give you a quote without running a credit check. As you’re shopping around, make sure you do comparison shopping without a credit hit each time.
  • Check your own credit and disclose it to the interested party. In Canada, a person is allowed to check their own credit without affecting their overall score. TransUnion and Equifax are the two credit rating agencies and they will provide you access to your own credit report for a fee. This helps when you want to check your credit rating for your own information. Most lenders, however, won’t accept a report you pulled yourself. (Photoshop anyone?)
  • This is where third-party sites like http://www.backcheck.net come it. They allow a prospective tenant to request (and pay for) their own credit report, and then share it with a landlord. See the subtlety here? You’re requesting your score, so there’s no negative impact. The great thing about this is that both parties benefit: the landlord gets a third-part copy of your credit report (and so doesn’t have to worry that you doctored it with Photoshop), and you get to protect your score. The downside: it’ll cost you about 70$.

Landlords, Brokers & Investors

Landlords, as a courtesy to your tenants, make sure you know what kind of credit check you’re running and inform the applicant. At my firm, we now give our tenants a choice of which type of check they want. We can run our standard “hard” check for free as part of our application process.

If the tenant wishes to use a “soft” check instead, we refer them to http://www.backcheck.net/tenant-screening/residential/tenant-share.html and require them to assume the cost. Third-party sites like www.backcheck.net are available across the US and Canada. All a landlord needs to do is fill in his or her email, and then send the application to the prospective tenant. He or she then receives a copy of the report in their email inbox.

Tenants & Borrowers

Be warned: lenders and landlords are pretty ignorant about the kinds of credit checks they run.

I was! This issue came to my attention because an investor-client of mine did too many simultaneous mortgage applications and almost wasn’t able to qualify for financing because his credit score tanked! I did some research to understand how credit checking works and figured out how to help others avoid this situation in the future.

As a result, my property management company started offering a third-party “soft” credit check option very recently. Just because a lender or a landlord is a professional, doesn’t mean they understand the ins and outs of the credit checks they are running!

So, investor, tenant and buyer: as you go through various application processes, make sure whoever is handling your credit knows what they are doing. If they sound shaky, refer them to this article 🙂

Maybe they’ll learn something!

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How to Shop for the Best Mortgage Offers in Canada in 2018

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Five Do’s and Don’ts of Shopping for a Mortgage

Want to get your mortgage financing under control? Read this!

Shopping for a mortgage is a very important part of turning your real estate investment into a winner. Your interest rate will probably follow you for five years, and working with a competent financing person can make the difference between doing and not doing a good deal. Most people don’t realize how much power and how many options they have when shopping for a mortgage.

Here’s a quick list of do’s and don’ts to make sure you get the best deal on your mortgage.

  • Do talk to multiple brokers / bankers

Mortgage markets are like markets for anything else: the more healthy competition you create, the better deal you’re likely to get. Not only will talking to multiple parties give you a sense for what’s a good rate, it will also allow you to say things like: “So-and-so offered me x, can you beat it?”

You want to handle this shopping mission before you start visiting properties. You don’t want to be scrambling to get your financing sorted out once the (sometimes) tight delays in a promise-to-purchase start running. Ideally you should know who’s getting your financing business before you start making offers.

Talk to a minimum of one conventional banker and one mortgage broker. These two types of specialists have access to different products, and have different ways of working. If you want to get the best rate and the most interesting conditions, it’s better to consult both.

 

  • Do get a pre-approval letter

Mortgage lenders can provide you with a pre-approval letter. This is a best-practice when shopping for a property, as in today’s competitive real estate markets the listing agent will want to protect his or her clients by seeing that a prospective buyer has the funds for a purchase.

If there are multiple offers, the listing agent will be inclined to deal with a buyer who has a pre-approval letter. It’s a listing agent’s way of minimizing surprises for his client-seller. Requesting a pre-approval from a prospective buyer also helps the seller avoid tying up his or her property without knowing whether the buyer has the funds. It’s not in the seller’s interest to allow his property to be “under contract” for two weeks while he or she waits for a response from the bank, especially when there’s no certainty as to the prospective buyer’s solveability.

As a buyer, a pre-approval makes your offer more attractive, and it makes you look serious. The added benefit to you, is that you can really know what your budget is before you start visiting properties. Pre-approval costs nothing.

I recommend my clients go through the process of qualifying before they begin their search. This way everyone is aware of the budget for the project being undertaken. You’ll also have the security that your offer, when you make one, is as strong as possible.

  • Do get every mortgage offer in writing

Make sure each broker you speak to gives you a written offer stating the rate, the terms (fixed/variable rate, the term, amortization period) and any bonuses they can include. Brokers and mortgage specialists can sometimes pay some or all or your notary fees if you ask. They can also sometimes give cash-back at signing or other incentives.

It’s important to get an offer in writing in case you need to comparison-shop. An email is a great tool for placing two parties in competition.

Tip: written confirmations also avoid any nasty surprises that can arise, should your broker forget what numbers he or she shot at you on the phone.

 

  • Do take the time to calculate your monthly payments

When you have an offer in writing, take the time to calculate what your monthly payments will be. If you’re not sure how to do this, there are many mortgage tools available online. Type “Canadian mortgage calculator” into Google. Before making an offer on a property, you need to know what your expenses will be. The right time to do this analysis is as you’re comparing mortgage options. Calculating your payments will give you a way of comparing the different propositions your mortgage specialists will be preparing.

For example, is it better to take a rate of 3.75% over 30 years or 3.5% over 25 years? How will this affect your cash flow? Or the amount of interest paid over the total amortization period? If you’re looking at an investment property, interest is a tax deductible expense, whereas on a principal residence it is not. You may make different decisions in either case. Without calculating your payments and your interest portion, you’ll be making these decisions in the dark.

Take the time to fiddle with mortgage calculations: you’ll see the major impact of +/-0.25% or an extra 5 years of amortization. You want to be aware the impact before signing your mortgage.

 

  • Do ask for extras & let the broker know there’s competition

Mortgage lenders know they operate in very competitive markets. It is common practice for a bank or a mortgage broker to offer to pay all or part of your notary fees. They won’t come out and offer this to you, so you need to ask.

The same goes for interest rates. Banks and brokers often have “stated” rates that are given to anyone who walks in off the street. The institution can always do better than the first rate they quote you. The best way to get them to come down is to let the person you’re dealing with know there’s competition. If you can quote a rate offered to you by another bank, even better! This way you can be sure they’ll ask head office for an exception.

The same goes for your amortization term. If you’d prefer a 30-year term, ask for it. Many bankers offer you the “standard issue” deal until you push for more. So, don’t be shy!

 

  • Don’t let every lender you talk to run a credit check

Mortgage brokers and bankers can be a bit cavalier with running credit checks. It costs them nothing and they have nothing to lose in the process. You do have something to lose! Each time your credit is consulted, your overall score is affected. If three or four institutions hit your credit in the mortgage application process, it can have a big impact on your overall score.

If you’re getting quotes from multiple parties (as you should!), make sure each party doesn’t run a credit check.

Competent brokers should know this. They can complete a pre-qualification with you and give you their rates without hitting your credit. When you speak with a banker or a broker, make sure you know at what point they will consult your credit file.

The best time for them to run a credit check is once you have chosen the deal that works best for you. This way you’ll only run your credit once in the process and not have a big negative impact on your credit score from too many credit checks.

 

  • Don’t wait until the last minute to shop for a mortgage

Okay – a word for the procrastinators: don’t leave your mortgage shopping to the last moment. Do your comparison-shopping before you make an offer. Don’t do your shopping when the time pressure is on you. In an offer, you’ll have a delay to produce financing approval. You don’t want this time pressure affecting your negotiating power by forcing you to go with the first offer a lender gives you. It’s stressful to risk losing the property to a time-delay. Make your decisions when the pressure is on the other guy!

 

Happy shopping!