This Article Is About Credit Score Changes During Mortgage Process And Its Impacts
Credit Score Changes during mortgage process happens.
- There are minimum credit score requirements on mortgage loan programs
- For example, to qualify for a 3.5% down payment home purchase FHA loan, HUD requires borrowers to have a 580 credit score
- HUD, the parent of FHA, allow borrowers with under 580 credit scores and down to a 500 FICO to qualify for FHA loans
- However, HUD requires a 10% versus a 3.5% down payment for borrowers with under 580 credit scores
- Fannie Mae and Freddie Mac require a minimum of 620 credit scores for borrowers to qualify for conventional loans
- Credit Scores fluctuate month to month
- Many mortgage loan applicants often get confused about how credit score changes during mortgage process are factored in during the underwriting process
- When a borrower qualifies for a mortgage loan, the loan officer will pull a tri-merger credit report
- A tri-merger credit report is when a lender pulls a borrower’s credit report from each of the major credit bureaus
- The middle credit score of the borrower is used as the qualifying credit score of the borrower
- This middle credit score is good for 120 days
In this article, we will discuss and cover Credit Score Changes During Mortgage Process And Its Impacts.
Tri-merger Credit Report And The Qualifying Credit Score
Everyone has three credit scores. The following are the three major credit bureaus in the United States. They each have their own algorithm in the calculation of consumer credit scores:
- Equifax has its own credit scoring system
- Experian has its own credit scoring system
- Transunion has its own credit scoring model
Lenders all use the borrower’s middle credit score in qualifying :
- For example, if a borrower has a Transunion credit score of 600, Experian credit score of 650, and Equifax credit score of 700, which credit score will the lender use?
- The middle credit score and the middle credit score here is the 650 Experian score
The middle credit score is the qualifying credit score the lender will be using during the mortgage prices. This middle credit score is good for 120 days.
What If My Credit Score Changes During The Mortgage Process?
Credit score changes during mortgage process depending on various factors.
- Maxing out credit cards will drop scores
- However, this drop is just a temporary drop
- It will go right back up once credit cards are paid down
- Late payments on any monthly payments will drop credit scores
- Applying for too much credit will have hard credit inquiries on the credit report
- Credit scores will drop with every hard pull
- Each hard inquiry can have a 2 to 5 point negative impact on credit scores
- Many borrowers wonder what credit score during mortgage process lender will base their qualifying credit score
- The credit score during mortgage process use will be the middle credit score that is pulled at the time the mortgage applicant signs the application and disclosures
However, some lenders like us can use the higher credit scores if credit score changes during the mortgage process for pricing.
What If My Credit Scores Drop During The Mortgage Application Process
If a mortgage lender qualified borrower for a home loan and has submitted the application, the credit score that was pulled at the time of the mortgage application will be used throughout the mortgage approval process. That score is good for 120 days:
- Borrowers with a middle score of 650, that credit score will be used throughout the mortgage application process
- In the event credit score changes during the mortgage process, it does not matter
- This is because the 650 credit score will be used until closing
- The initial credit score is good for 120 days
- After 120 days is when credit scores expire and a new credit report needs to be pulled
- Credit scores are normally good for 120 days
- Most mortgage loans close in 60 days or less
- Many mortgage lenders will do a soft credit pull prior to issuing a clear to close
- The reason for the soft pull is not to get a new credit score but to see if the borrower has incurred more debt that may affect their debt to income ratios
- What underwriters look for is that borrowers have not incurred more debt or had late payments
- This can affect either the debt to income ratios and/or financial distress and the ability to repay the new mortgage loan
- Many times when borrowers use their credit cards and their credit utilization ratios are higher, then it is normal for borrowers credit scores to drop
As long as it does not affect the debt to income ratios, there should be no issues.
Increase Of Credit Score Changes During the Mortgage Process
A mortgage loan applicant’s credit scores have a lot to do with which interest rates they get, especially with conventional loans.
- Let’s take a case scenario on how credit scores have an impact on mortgage rates
- The minimum credit score required to get a 3.5% down payment FHA Loan is 580
- However, those with credit scores under 620 will definitely get a higher interest rate on a FHA loans
For example, let’s take a case scenario:
- 580 credit score, their interest rate might be at 5.5
- If their credit score is between 600 and 619 credit score, their interest rate may be at 4.75%
- For borrowers with credit scores of 620 or higher, their credit scores may be at 4.25%
If the increase of credit changes during mortgage process, The team at Gustan Cho Associates can use the higher credit scores and cancel out the initial credit scores for pricing and locking mortgage rates.
Let’s take a case scenario on borrower’s middle credit score at the time he signed a mortgage application was a 580 but increased to 640. Borrowers can get a better lower rate due to an increase in credit scores:
- During the mortgage application process, the applicant’s credit scores jumped to 640 from 580
- With the 640 the borrower can qualify for a 4.25% interest rate versus a 5.5% on a 580
- The lender can give a better rate if the increase of credit score during the mortgage process
- The borrower will not be stuck with the 5.5% interest rate but rather get the lower interest rate
On the flip side, if the borrower had a 640 credit score when first applied but credit scores dropped to 580, the 640 credit score will be used for pricing.