Loan Think

Why soft credit pulls are key for mortgage workflow

Soft credit pulls, by design, are meant to help all parties involved in the mortgage industry. These types of checks are typically done by financial institutions to better understand a borrower's history, as well as assess the risk of extending credit to someone. They reveal things like lines of credit, loans, current credit score, and payment history in an easily digestible, efficient way, which eases the mortgage process for borrowers and lenders alike.

Soft credit pulls benefit homebuyers in a variety of ways. They don't affect credit scores at all — a huge differentiation from hard credit pulls, which can take a few points off simply by conducting the check itself. Another benefit? Loan applicants can feel safe knowing their financial data cannot be sold, and outside companies won't be able to find out they are searching for credit.

The same can't be said for hard credit pulls, which often involve the sale of borrowers' information. This has been a hot topic in Congress, where the Trigger Leads Abatement Act of 2023 was recently introduced by Rep. Ritchie Torres (D-NY). This latest version of the bill would amend the Fair Credit Reporting Act to ban credit reporting agencies from selling applicant information unless they specifically allow what's known as "trigger leads." Typically, the moment someone applies for a residential mortgage, the credit bureau learns that person is searching for a loan and proceeds to sell their data to different lenders. Not only does this compromise the privacy of those looking for homes, but it can also deter them from continuing their real estate search. Soft credit pulls take the tension out of the equation by protecting the consumer first and foremost.

It's not uncommon for potential homeowners to apply for loans just to test their eligibility, qualifications, affordability, and options. If these applicants are only trying to gauge the price range of the mortgages and homes available to them, it's possible they may not go through with an actual loan at all. With soft credit pulls, this won't lead to expensive consequences, thus removing the friction between borrowers and lenders that happens when more in-depth preliminary checks occur. By making applicants feel more comfortable in the early stages and opening more of a dialogue between them and their financial institutions, it increases the likelihood of an actual deal being made.  

Lenders, on the other hand, experience a range of benefits by opting for soft credit pulls, rather than the expensive and time-consuming process of hard inquiries. For one, the price of the process itself is dramatically lower. Starting in 2023, there have been significant increases by the credit bureaus and FICO to the cost of pulling a hard credit file; in some cases it's four or five times what they were previously. Initial data from Blend shows that lenders who have adopted soft credit into their workflows have saved up to 71% compared to utilizing all hard inquiries. That doesn't even account for the benefits of avoiding trigger leads which can cause lower conversion by alerting competitors.

These increases come during a difficult time for an industry already dealing with significantly high costs to originate. Typically, lenders absorb most of the costs during fallout — when applicants back out of a mortgage or are declined. To put things into perspective, a hard credit file can cost lenders anywhere from $50 and up, while a soft credit file goes for just $2 or $3. With $1.69 trillion in originations expected for 2023, that's a lot of credit checks — and a lot of money spent on them. 

Besides reduced costs, lenders gain a big competitive advantage when they utilize soft credit pulls. By enhancing the borrower's experience and making the process more seamless, financial institutions have the opportunity to stand out. Applying for a loan can be a difficult and stressful process, so it makes sense that most people would want to partner with a lender who makes the process easier. In turn, financial institutions that conduct soft inquiries will see a much higher conversion rate, which simply means they can turn potential homebuyers into actual borrowers. 

In just a matter of months after making the feature available, roughly 45% of all the credit checks on the Blend platform are now soft inquiries. It's a true win-win for everyone involved in the mortgage process, from future homeowners to the financial institutions helping them get there.

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