You received your mortgage approval, you figure everything is good to go and you are free to do with your finances as you wish, right? Unfortunately, this can hurt you in the end. Lenders have gotten smarter with their ways, especially after the housing crisis. Now, not only do they recommend that you don’t open a new credit card, buy a new car, or rack up your current credit card balances before you close, they check to make sure you don’t! Many lenders either pull credit a few days preceding the closing or even on that day, depending on when they provide the “clear to close.” This means they could pull their approval at the last minute if you changed anything regarding your finances.
Why Lenders Pull Credit Again
There is often a long lapse of time between when you apply for a mortgage and when you actually close. If it is a purchase, you could be looking at as long as six months before you close. That is a long time to let your credit go unchecked. What if you racked up your credit card bills when you purchased furniture for the home? What if your car broke down and was unfixable and you had to purchase a new car? These things might not make you unable to afford the mortgage, but they definitely affect your debt ratio. If your ratio is beyond the recommended guidelines for the loan program, the lender has to pull their approval. If they don’t, they could be on the hook with the overseeing agency, such as Fannie Mae or Freddie Mac. Lenders are held responsible with the new regulations, such as the Dodd-Frank Act and the Ability-to-Repay Rule.
Lenders Want to Minimize Default
Aside from the Big Brothers watching the lenders, no bank wants to put themselves at risk for default. If you were to increase your debt load, it depletes your monthly resources. You might get in over your head, so to speak. What looks okay on paper might be more difficult to afford than you originally thought. After a few months of balancing the new mortgage payment along with your other monthly debts, you might find it too difficult to own a home. Because you just purchased it, your equity might not be very high, depending on how much money you put down. This could put you at great risk for letting the home go into foreclosure. This is what lenders try to minimize by pulling your credit again at the last minute.
It Could Change your Interest Rate
Even if you did not overextend your credit between the time you applied for the loan and the closing date, you may still be affected when the lender pulls your credit. If there is a significant disparity between your original credit score and the score they receive prior to closing, the lender may have to readjust. Your credit score determines the interest rate you receive. It’s called a loan-level pricing adjustment. For every credit score category, the lender must adjust the interest rate. If your credit score dropped to a lower category because you had a late payment during the time you waited to close on your home or you closed an account without realizing the implications, it could affect your interest rate. It is in your best interest to keep your credit as consistent as possible during this time. Make sure you make your payments on time, don’t increase any of your outstanding credit, and don’t close any accounts. Once you close on your mortgage, you are free to do what you want with your credit, but until then, keep things as consistent as possible.
Mortgage Lenders Look for Inquiries When They Pull Credit
One last thing lenders look for when they pull credit prior to the closing is how many inquiries you have on your report. Inquiries are other lenders who pulled your credit in the interest of either increasing your existing credit lines or extending new credit. Even if you don’t have any new credit lines reporting, the inquiries may hurt you. The lender may require a written explanation for these inquiries. They may also need extra time to determine if you had any new credit extended to you. Because it sometimes takes a little while for new credit to show up on a report, the lender has to proceed with caution. If they provide you with the mortgage knowing there was a chance you had new debt out there, they could end up stuck with the loan on their own portfolio because no one on the secondary market will purchase it any longer.
In order to prevent any issues with your credit, don’t make any changes before you close on your loan. Any purchases you need to make can wait. If you cannot pay cash, then consider yourself unable to afford it at the moment. This way you take away any risk of your credit score changing for the worse. Also, avoid any other inquiries with any lenders. Even if the inquiry is literally just an inquiry and you are not serious about another loan, don’t take the chance. Every lender handles these situations differently. Some will take your word for it that you didn’t open anything new, while others will delay the closing until they have concrete answers.
Always assume a mortgage lender will pull credit prior to the closing, even after the initial underwriting process. Even if they don’t mention it, they will likely do so in the background. You might not hear anything about it and that is a good thing. .This means nothing changed and you still have an approval. However, if you do hear something, it is usually not a good thing. You likely have to make changes to your finances or take a higher interest rate. If the lender requires you to pay off a specific debt in order to make your debt ratio work, it could put you in a bind. No changes are worth it when you deal with a loan closing – just wait until the day after you close before making any changes.