Credit Score Changes During Mortgage Process And Its Impacts

Impact of Credit Score Changes During Mortgage Process

Gustan Cho Associates are mortgage brokers licensed in 48 states

This guide covers the impact of credit score changes during mortgage process and how it impacts borrowers. Credit Score Changes during mortgage process happen. There are minimum credit score requirements on mortgage loan programs.  The impact of credit inquiries and new accounts is generally small and temporary.

Your credit score can be subject to changes during the mortgage application process for several reasons. Here are some factors that may influence your credit score during this time:

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  and down to 500 credit scores.

Are Credit Score Changes During Mortgage Process Common?

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The middle credit score used to qualify you for a mortgage is the score used through the mortgage process. The qualifying credit score is good for 120 days. It does not matter with credit score changes during mortgage process. Your credit scores can drop significantly and it will not matter.

When you apply for a mortgage, the lender will pull a tri-merger credit report as part of the application process.

Loan officers will pull a tri-merger hard credit pull prior to running your file through the automated underwriting system. There are soft and hard pull. However, in order to be able to run the loan application through the automated underwriting system, it needs to be a hard inquiry.  A hard inquiry has a small, temporary impact on your credit score.
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Maintaining Good Credit During The Mortgage Process

Your credit utilization ratio is the amount of credit you’re currently using compared to your total available credit. Taking on a mortgage might impact this ratio, depending on the size of the mortgage compared to your other credit limits. Lenders like to see a diverse mix of credit types.

Adding a mortgage to your credit profile can have a positive impact in this regard. Making on-time payments on your mortgage is crucial for maintaining a positive credit history.

Late payments, missed payments, or defaults can significantly impact your credit score negatively. Lenders consider your debt-to-income ratio when evaluating your mortgage application. While this doesn’t directly impact your credit score, it affects your overall financial health and your ability to manage debt.

Credit Score Requirements

The specific credit score requirements for mortgage approval can vary between lenders and mortgage programs. If your credit score is on the border of meeting the requirements, it might fluctuate during the approval process. Maintaining good financial habits and responsible credit management will contribute to the long-term health of your credit score.

It’s important to note there may be some short-term fluctuations on all three credit reports. Credit scores can change daily. Credit score changes during mortgage process happens.

If you have concerns about your credit score and the mortgage application process, it’s a good idea to discuss them with your lender. They can provide guidance on how specific actions might impact your application and offer advice on how to improve your creditworthiness.

Fannie Mae High Credit Standards For Borrowers

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 borrowers 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 three credit reports: Experian, Equifax, and Transunion.

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.

Fannie Mae and Freddie Mac Require 620 credit Scores For Qualify Conventional Loan, Click Here

Qualifying Credit Scores From Tri-Merger Credit Report 

When you apply for credit, creditors will do a hard pull which is a hard credit inquiry. Hard credit inquiries will drop your credit scores. 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.

How Do Lenders Calculate The Qualifying Credit Score To Be Used For Mortgage

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 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.

Will Credit Scores Drop Due To Hard Credit Inquiries by Lenders?

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 mortgage process for pricing.

What If My Credit Scores Drop During The Mortgage Process

What If My Credit Scores Drop During The Mortgage Application ProcessIf 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 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. If the mortgage loan does not close within the 120 day window, a new tri-merger credit report needs to be pulled. The middle credit score of the new credit report will be used.

Contact Us For Lender Which Help You For your Mortgage Process, Click Here

How Long Are Credit Scores Good For Before It Needs To Be Pulled Again

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 Do Underwriters Look For When Analyzing Borrower’s Files?

What underwriters look for is that borrowers have not incurred more debt, had recent collections and/or charged offs appear on credit report, or had late payments. This can affect either the debt-to- income ratios 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.

Increased Credit Score Changes During 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 FHA loans.

Can You Use Higher Credit Score Changes During Mortgage Process?

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 the 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.

Case Scenario of Credit Scores Changes During Mortgage Process

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 redit score when first applied but credit scores dropped to 580, the 640 credit score will be used for pricing. If you are approved for a mortgage, it will likely result in a new credit account being opened. Opening a new credit account can affect your credit score, especially if you have recently opened other credit accounts.  Contact Us For Your Mortgage Loan, Click Here

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