Financing and my credit?

[Jared Whitfield]

Hello all, Hopefully this isnt a dumb question and Im not even sure what the right category for it may be. However I cant seem to locate an answer. When applying for financing consistently for flips doesnt this ding your credit with all these hard inquiries? Does it start to send red flags to banks or does it do so little damage that its ignored? Im very hesitant to apply for financing cause I want the best deal but the only way to see the actual interest percent is to apply to all these banks which I feel may start damaging my credit with multiple applications. Thanks in advance for any insight.

[Chris Mason]

Hi @Jared Whitfield,

In general the hype about credit inquiries is completely blown out of proportion relative to the actual impact it has on your FICO score, which is minimal, especially if it's mortgage inquiries and not credit card inquiries. I have literally never seen someone with bruised credit due to mortgage inquiries (& have an 827 FICO credit report with 2 full pages of credit inquiries that I show people, in the office, with name/ssn/etc blacked out). What we see all the time is someone with bruised credit, who cannot take personal responsibility, blaming the credit inquiries, because that's an easier cop-out than owning responsibility for the late payments, the car repo, the civil judgement, etc. These are typically the people you see posting on blogs, etc, about how essential it is to avoid credit inquiries - people that trashed their own credit but do not want to take responsibility for it. 

What is true is that every time you take out a mortgage, your credit score will tank until you have an on-time payment history on that new debt, especially if it is your first mortgage ever. This is just a fact of life for people doing a bunch of flips. If you have a 760 FICO and no debt, and then suddenly take on $400k in debt, you are in fact objectively less creditworthy until you prove you can handle the new debt, and your FICO score will reflect this objective reality. So it might drop from 760 to 690 immediately. And then after 4 or 6 on-time payments, it might shoot up to 795, higher than it was to begin with. This is another one you see online - "AVOID CREDIT INQUIRIES! I took out a car loan and my FICO score dropped 50 points!!!!" - it wasn't the credit inquiry, it's that this is the first car loan you've ever had, and you have no payment history on it. If this person had inquired about a car loan, but not taken one out, their FICO wouldn't have dropped 50 points (& I know this because I look at credit reports every day). 

But if you're trying to do another flip before you've made a single payment, then it sucks but you might just have 690 FICO financing for that one. Again this isn't a credit inquiry story, it's about the rapidity with which you are taking on actual debt, relative to having payment history on that debt, which is ZERO on-time payments until you've made that first payment and 1-30 days later the credit report updates to reflect that.

In general I do notice that you're worried about credit inquiries like a normal consumer, and not worried about "will the mortgage actually close, and close on time," which is what experienced real estate investors know from experience to worry about. I'd suggest skipping a lost/botched/nightmare/etc deal or two that it typically costs an experienced real estate investor to learn this lesson, and worry more about "will it actually close?" than +/- $500 in closing costs or a 3 point FICO dip. The forest matters more than any particular tree in it, so worry about the forest rather than the one irrelevant sapling. The lowest closing cost / rate / etc lender (HML or otherwise) out there promising all sorts of whimsical numbers at the preapproval stage probably isn't going to deliver, at the end of the day (the whimsical numbers go away once you're in contract and live to lock, or the whimsical numbers stay but it isn't going to close making the whimsical numbers irrelevant). And don't take my word on that, ask your fellow investors at the next REIA meetup you go to. If it looks too good to be true...