Credit Score Changes During Underwriting Process

This article covers credit score changes during the mortgage process. 

What happens if you apply for a mortgage and your credit score drops during the loan process? Will the lender cancel your approval? Will your interest rate be higher? Or does it even matter? 

  • Lenders check your score when you apply for a home loan and often at least once before closing. 
  • In most cases, a score that drops won’t hurt you unless it’s due to new derogatory information.
  • Sometimes, improving your score during the loan process can get you better pricing.

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When Do Mortgage Lenders Pull Credit Scores?

When Do Lenders Pull Credit Scores During Mortgage Application Process

Mortgage lenders pull your credit report when you apply for a home loan. Normally, they’ll get your scores from the three major credit bureaus — Experian, Equifax and TransUnion. If the lender pulls all three scores, the one underwriters use is the middle score. If a lender pulls two scores, it uses the lower of the two. The score used is called the “representative credit score.”

If you have multiple applicants, the score used to set your interest rate and determine your loan eligibility is the representative score of the borrower with the worst credit. 

Your initial credit report is good for 120 days and determines your loan eligibility and interest rate. If your mortgage loan does not close in 120 days, the lender will pull a new report and that score becomes the “official” one for your file.

Prior to closing, most lenders perform a quality audit and pull your credit report again. They look for these things:

  • Inquiries that could mean you’re shopping for credit and taking on more debt than you disclosed on your application
  • New accounts that might make your mortgage less affordable
  • Derogatory items that mean you’re not a good risk

Any of those issues would, at best, send your application back to underwriting and delay your closing. At worst, these surprises could kill your home loan approval. 

Related: 4 problems that could ruin your mortgage

What Happens if Your Credit Scores Increase?

How Credit Score Changes During Underwriting Process Affect Rates

When you apply for a mortgage, one of the first steps a lender takes is pulling your credit report. A credit check lets the lender know if you meet minimum credit guidelines for financing. In addition, your credit score is a factor in determining your interest rate. Applicants with excellent credit get better mortgage offers than borrowers with lower scores. 

It’s fairly common for borrowers to apply for mortgages without locking in their interest rate.  They might want to get preapproved without having yet lined up a specific property. Or their home is under construction and the loan won’t close for months.  Or they are trying to refinance and don’t want to lock until rates drop. 

In any case, as long as you have not locked in, your mortgage rate is not set. If your credit score increases during the loan process and you are not yet locked in, you’ll often get the benefit of the higher score when you finally do lock in your rate. If you are already locked in, you won’t benefit from a better credit score. 

Even one point can change your interest rate. Most loan pricing is done in tiers. If you increase your FICO score from 679 to 680, for instance, you hop into a better tier and get a lower interest rate. If you’re at 680 already, you’d have to add 20 points to get to 700 and the next higher tier. 

Related: Common underwriting problems that could delay closings

What Happens if Your Credit Score Drops During the Mortgage Process?

If your credit score increases during the loan process, it won’t hurt you, and it might help. But things can get a lot more complicated if your credit score drops during the mortgage underwriting process. 

Fortunately, a lower score at closing is not all by itself a reason to increase your mortgage rate or decline your loan. Credit scores move up and down all the time, and a small drop won’t cause the lender to reprice your mortgage or reverse your loan approval. 

However, if your credit score plummets because of a derogatory event like a missed payment or significant addition to your debt load, your loan approval may be in jeopardy.  Your file goes back into underwriting. If you still meet the lender’s guidelines, you’ll probably be able to close your loan. If you don’t, you’ll no longer have a loan. In that case, you may be able to save it by changing programs or delaying your loan until you fix your credit. 

Fannie Mae sends your application back into underwriting if:

  • Additional debt turns up and it would increase the total expense ratio beyond program limits.
  • New derogatory information is detected and/or the credit score has materially changed.

Again, if you don’t close your loan within 120 days of pulling your initial credit report, and your credit score drops, the lower score becomes the official score. That can be a problem if it’s below the minimum required for that loan program. It can also impact your mortgage rate.

Related: Can I be denied a mortgage after being pre-approved?

Protect Your Credit Score During the Mortgage Process

Monitor Credit Report During Mortgage Application Process

 

Many mortgage applicants make the mistake of believing that once the lender has their credit report they are home free. That’s just not true. 

Refinancing borrowers should be especially careful. Home purchases have tight deadlines, so refinances can have lower priority and take longer when lenders get busy. If your refinance takes a few weeks longer than expected, you’ll get a new credit report and potentially a new set of problems. 

Similarly, if your new home is under construction, your closing date might be very changeable. You don’t want to be three weeks out from closing and have a new credit report turn up problems. 

Here’s how to protect your credit during the mortgage process:

  • Avoid applying for new credit — no furniture for the new home, no new car, no increase in credit limits.
  • Do not increase your credit balances. Credit utilization makes up 30% of your credit score.
  • Pay every account on time. Set up automatic payments if this is an issue for you. Payment history comprises 35% of your credit score and one missed payment can take off 60-120 points!
  • If you have old collection accounts, do not contact the creditor, dispute the balance or have any activity at all because old accounts get less weight in scoring models. Any activity on the account can make it new again.

 If you have any questions, contact and discuss them with the mortgage loan originator or call us at 262-716-8151 or text for a faster response. Or email us at [email protected]. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays. GCA Mortgage Group has a national reputation of being a one-stop mortgage lender due to not just having no lender overlays on government and conventional loans but offering dozens of non-QM and alternative mortgage loan programs.

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