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WILL RATE-SHOPPING HURT CREDIT SCORE?

There is a pervasive myth in the real estate world that you don’t want to apply with too many lenders because it will hurt your credit score. I don’t believe this is true. It does have a kernel of truth in that having too many inquiries DOES bring down your score, but, it depends what kind of inquiries and how far apart they are.

 

No one knows the EXACT formula the credit scoring companies use. It’s a closely-guarded secret, kind of like how Google ranks search results. However, their published guidance on this area is that if you have several credit checks around the same time from the same type of lender (auto or home), it’s not a big deal. The scoring model assumes that you are starting to look for a house and need to be pre-approved, or that you are shopping for the best rate.

 

So if you have 2-3 inquiries from mortgage lenders all within the same 30-day time period, they may lump those together as just 1 inquiry. But if they see inquiries from auto lenders, credit card companies, boat finance companies, etc. several times every month, that will hurt your score.

 

But why do they care about inquiries? Shouldn’t they just care about your income and whether you can afford to pay your payments? They may think you are applying for loans and getting turned down, which is a red flag. They wonder if there is something these other lenders know that you are hiding from them. Or they may think you may be trying to run up a bunch of loans and then file bankruptcy (it’s been tried before…). They may also be worried that you are becoming a serial borrower and will get in over your head in debt.

LIQUID FUNDS

Buyers nearly always need to bring some kind of funds to closing to cover their down payment and closing costs. The standard real estate contract says that the buyer certifies that their down payment and closing costs funds are LIQUID, which means the money is instantly available in a checking or savings account. This means if buyer can’t convert them to cash in time to close the escrow, they could be deemed to be in default. Below are some of the types of funds that are NOT considered liquid.

 

Certificate of Deposit (CD): There may be penalties for early withdrawal and it could take some time to receive the money.

 

401(k) (or other retirement account): These vary widely, so check with your HR department and START EARLY. The biggest problem with these is the red tape and delays (sometimes WEEKS), and then on top of that you will likely have significant penalties and taxes due. Sometimes you can take a loan against your retirement account, which can be fairly easy and may avoid any penalties. Sometimes you can withdraw and put it back within a certain amount of time without paying a penalty.

 

Stocks/Mutual funds: On the one hand, these are pretty “liquid” in that you can convert these to cash quickly by making a phone call or logging into your account. The danger area is that the values fluctuate, sometimes greatly, so it’s better to convert to cash sooner rather than later.

 

Home Equity Line of Credit: People mistakenly think these are liquid funds, but they are not truly liquid until the money is pulled off of the line and put into a checking or savings account. We’ve seen banks turn off lines of credit before without warning.

 

Gift Funds: Some buyers get gift funds from a relative, but where are those funds liquid?

WHEN CASH ISN’T CASH

Cash offers are expected to be easier and more likely to close escrow since there is no lender and usually no appraisal involved. Many (but not all) sellers will take a little less if the offer is cash versus a financed offer. If a seller has a particularly urgent need to close quickly and on time, they may take a substantial discount for cash. But what about cash offers that aren’t really cash offers? What I am talking about are offers that are presented as being “cash” offers, but when I do a little digging, I find out that that may not be the case.

 

It usually revolves around the buyer really needing to close escrow on another home in order to purchase the next home. They know that contingent offers are frowned on, so they will produce other documentation showing they COULD pay all cash and they present that with their offer. Maybe it’s a copy of 401k statement, or bank statements showing liquid funds, or maybe even a line of credit they can pull from, or a combination of all these. But then when it’s time to close the escrow, all of a sudden they need an extension, and it comes to light they really never intended to use those other funds and they really need their home to close escrow. This becomes a real problem because the seller may have taken a discount or passed up other good offers to take this easy, “slam-dunk” cash offer.

 

Bottom line is you should only write a non-contingent, cash offer if you truly have those funds liquid and available. “Liquid” means sitting in checking or savings. I’ll discuss in another article the challenges you may have pulling from various non-liquid and/or retirement accounts.

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