Most people know that lenders pull your credit report and check your credit score when you submit your mortgage application. Lenders use your credit score to help determine your loan terms including your mortgage rate and they review your credit report for derogatory events such as late payments, collection accounts and more serious credit matters. They also review the active loan accounts listed on your credit report to verify the information you provided on your application and to confirm your debt-to-income ratio.
What many borrowers may not realize is that lenders may check your credit score a second time before your loan closes. Until you reach the "clear to close" phase of the mortgage process the lender may run your credit again to determine if you have opened any new debt accounts or increased your outstanding loan balances significantly.
"Clear to close" means that all of the conditions to close your mortgage have been satisfied, the lender's underwriter has issued final approval and your loan is ready to close. Until the lender tells you that you are "clear to close" you may have outstanding conditions to address, including a potential secondary credit review.
Please note that If the lender intends to check your credit prior to closing, the additional check should be listed as a condition to close but unfortunately that is not always the case. To clear up any potential confusion, when you submit your mortgage application we advise you to ask your lender if they intend to check your credit again.
Most but not all lenders check your credit a second time with a "soft credit inquiry", typically within seven days of the expected closing date of your mortgage. A soft inquiry is different than the hard credit inquiry the lender does when you initially apply for the loan, which may cause your score to dip, at least temporarily.
A soft inquiry should not negatively impact your credit score and allows the lender to determine if there have been significant changes in your credit profile since you applied for the mortgage. Think of it more as a summary review of your credit as opposed to a comprehensive inspection.
If you incurred significant new debt or opened several new loan accounts since you submitted your mortgage application, this can hurt your credit score or the debt-to-income ratio that lenders use to determine the loan you can afford. If you take on too much new debt, your credit score drops substantially or your monthly debt payments increase significantly, the lender may reduce the mortgage amount you are eligible for.
In certain cases, you may no longer qualify for the mortgage and the lender rescinds its conditional approval. This outcome is highly unusual and I only offer this information as a worst case scenario.
With a second credit check, lenders are focused on applicants whose credit profiles have changed significantly such as if you take out a new car loan, apply for multiple new loans or run up credit card debt by making major purchases. This is why we highly recommend that you not apply for new loans or incur significant new debt until after your mortgages closes. It is also important to continue paying your debts and bills on time.
In some cases, however, increasing your debt balance is unavoidable, such as if you experience a personal emergency or medical issue. In this situation, we recommend that you pay off or down the new debt as much as possible.
We also recommend that you draft a letter that explains the emergency that led to the higher debt balance and outlines the steps you took to address the issue. The letter should be factual and to the point.
If you have proactively reduced the debt balance, it should not interfere with your ability to close your mortgage, even if the higher balance currently appears on your credit report when the lender runs the secondary check. You should also gather documentation that verifies that the debt has been paid down or off including proof of payment and the current account statement with the lower balance.
In the event that your lender performs a second credit check prior to closing and asks about the debt you can provide the letter as well as the supporting documents to quickly address the issue. If the lender does not run the second check there is no need to raise the issue or provide the documents.
With a little knowledge and preparation you should be well positioned to close your mortgage whether the lender checks your credit again prior to closing or not.
“What exactly happens when a mortgage lender checks my credit?” CFPB. Consumer Financial Protection Bureau, March 3 2017. Web.