Updated: May 13, 2021
Your credit score is a major factor when determining a mortgage refinance rate. The better the score [Link to credit score post], the more likely you are to get a competitive rate.
That’s why lenders like to conduct credit inquiries. And it’s why you’re asked to allow them to conduct “soft” or “hard” credit pulls.
A soft inquiry or pull is like a basic background check. It shows lenders exactly what you would see if you looked at your own credit report — payment history, available credit lines, and any current loans. It’s used to get a sense of how well you manage your credit, provide accurate quotes, and to pre-approve you for an offer. It’s also used to help track signs of identity theft [link to SSN post].
Because soft pulls act as a simple review and are not directly related to a credit or loan application (in other words, it doesn’t mean you completed a credit application), they do not affect your credit score.
If you decide to continue with your loan application after receiving an initial quote or pre-approval offer, lenders will then need to do a “hard” pull to formally approve your application.
A hard inquiry or pull is a formal action needed to finalize your credit or loan application.
Because of its formality, “hard” pulls do appear on your credit report and can have a temporary, negative effect on your overall credit score.
Note that most lenders do understand that multiple hard pulls could also simply mean that you’re currently shopping around for better interest rates and that it does not necessarily equate to financial hardship.
The reason it affects your credit score is because multiple pulls could also mean that you have multiple credit accounts. And multiple credit accounts signal trouble — either you’re unable to pay bills regularly or you might be at risk of serious overspending. Consequently, your credit score could take a hit.
But no need to worry too much because hard inquiries only remain on your record for about two years. And at the end of the day, lenders care much more about your payment history and credit utilization.
As long as you have a record of on-time payments and are currently employed with a stable income, allowing a couple hard credit pulls is not the end of the world.