Credit Score Inquiries Impacting the Score
Q. I’m going to start getting some lender quotes for purchasing a property. But each lender wants to pull my credit score. My credit is really good, and I don’t want it to go down because of all the inquiries from different lenders. Is there any way to get around this? Kim S., Denver
A. There is no need to worry, especially since you note that your credit score is really good. An inquiry might drop your credit score a few points on a temporary basis. But if you went to several mortgage lenders within a 30-day period and they all pulled credit scores, it would generally only count as one credit inquiry for all of them. The FICO scoring system wants people to shop for mortgages, so they don’t penalize you for shopping around.
That applies to the same type of credit – whether it is a mortgage, auto or student loan. But if you apply for credit with each different type of lender, then yes it will impact your credit score for each type of loan.
I’d suggest you do a little reading up on how FICO works, get qualified for several lenders within a 1-month period, and get cost estimates for financing your property as long as you are getting qualified for financing.
Buy Home to Earn Equity and Trade Up
Q. I’m planning to purchase a home and plan to trade up in a couple of years. You keep writing that it isn’t a good idea, but I don’t understand why. I’ll earn some equity so I can buy a better property. Please advise. Mike M., Boston
A. The problem is that while you might earn some equity in a couple of years, it is all going to be wiped out when you sell the property. Real estate transaction costs can easily jump to12 percent of the sales price. Costs like commissions, seller repairs, escrow, title, vacancy and improvements can’t be recouped.
So, the most important issue you should consider is over X years of time, how much will the property go up in value. If you estimate it will increase in value 2.5 percent per year, that means it will take about five years to increase 12 percent. Then you sell and pay that 12 percent in sales costs and you are back to $0 of equity built up due to those sales costs.
That’s why I opine that real estate is a long-term deal and five years is about the breakeven for ownership. But prove it out to yourself as noted above. Good luck!
Leonard Baron, MBA, is America’s Real Estate Professor®. His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University lecturer, blogs at Zillow, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com. Email your questions to: Leonard@ProfessorBaron.com