Agreement in Principle and Soft Credit Searches
More and more people these days pay much closer attention to their credit rating. Consumer awareness of credit scoring is higher now than ever before and I’d say at least half of people who contact us for the first time have already looked at their credit report online. There are many different credit reference agencies out there, most people will have heard of Experian or Equifax but the free trial we recommend potential new clients take is with Check My File because this report “sweeps” several of those reference agencies and collate the information into an easily understandable colour-coded report.
Often, clients ask if we will be doing a credit search on them because they are aware that too many searches can have an adverse effect on their credit score. Lenders always run credit checks but we always seek a client’s permission before doing so. There are 2 different types of credit searches that Banks can run on a customer: hard searches or soft ones.
What is a Hard credit search?
A hard credit search is an in-depth look at your credit report and any financial institution carrying out one of these should seek your permission to do so. The advantage of a “hard” search is that because the lender is looking into your situation quite closely, if you pass the credit score then it’s fairly likely that your application will ultimately be successful. The only thing that can really go wrong from then on is if for some reason you cannot provide satisfactory documentation to back up the information you have disclosed or it turns out you have provided false details.
The bad news about a hard search though is that it leaves a “footprint” on your credit file so that anyone who looks at your report in the future can see you have had a search carried out. This isn’t necessarily a bad thing, but if you have several footprints registered in a short period of time then it could look like you applying for lots of credit at the same time. The footprint does not state whether your application was successful or not but if you have several searches over a few weeks then Lenders’ systems could wrongly assume you are being declined on the basis that “Why else would you go to Lender number 2 unless Lender number 1 had said no?”.
The odd hard footprint on your record from time to time is no big deal so there’s no need to worry too much about this, just be careful not to have too many.
What is a Soft credit search?
A soft credit search is a “lighter touch” look at your financial situation and this is the kind of search that would routinely be carried out on price comparison websites to give you an indication of what products might be available to you, or if someone wants to verify your identity. Some mortgage Lenders do soft searches in the first instance and more and more Lenders seem to be changing to doing this type of search. Whilst the financial institution doing a soft search obtains less information about you than if they had done a hard search, an Agreement in Principle from one of these Lenders is usually still an extremely strong signal that your full application will be accepted.
The really good news about soft searches is that whilst you will be able to see that someone has carried out a soft search on you if you check your credit file (people are often very surprised how many soft searches have been carried out on them!) these searches are not visible to other Financial institutions like Banks. This means that you can apply for an Agreement in Principle for a mortgage without it damaging your credit score irrespective of whether it is successful or not.
If you are wanting to make an offer on a property I always think it is an excellent idea to have your mortgage agreement in principle in place prior to contacting the Estate Agent. You want to give yourselves the best possible chance of securing the property you want at the lowest price so if you can present yourselves as having your finances in place then you are definitely putting yourself in a stronger position. Having the Agreement in Principle also sometimes puts the Agent off trying to “cross-sell” their own in-house mortgage services to you.