Credit Score Changes During Underwriting Process

What happens if you apply for a mortgage and your credit score changes during underwriting 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 credit score changes during underwriting process does not hurt you unless it’s due to new derogatory information. Sometimes, improving your credt score during underwriting process can get you better pricing. In the following paragraphs, we will cover credit score changes during underwriting process.

When Do Lenders Pull Credit Scores During Mortgage 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. 

How Long Is Initial Credit Score Used To Qualify Good For?

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. 

What Happens if Credit Scores Increase In The Mortgage Process

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. 

Can You Use Higher Scores If Credit Scores Increase In Mortgage Process?

If the credit score changes during underwriting process result in a higher credit score, some mortgage lenders will let you reprice your rate with the new updated credit score changes during underwriting process. If your credit score is higher, your rates will be lower. If the credit scores dropped, then you do not have to worry about a reprice on rates.

Improvement of Credit Score Changes During Underwriting Process

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. 

What Happens if 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.

Recent Late Payment Drops Credit Scores During Mortgage Process

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.

Steps in Monitoring Your Credit During The Mortgage Process

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.

What If Credit Scores Dropped During Underwriting Process

Credit Scores and Income are two of the most important factors that determine whether or not a mortgage borrower qualifies for a mortgage loan. All mortgage loan programs have minimum credit score requirements. FHA Guidelines On Credit Scores to qualify for a 3.5% down payment FHA mortgage home loan is 580 FICO. For borrowers with credit scores below 580 FICO credit scores, then the home buyer needs a 10% down payment on their home purchase. Fannie Mae Guidelines On Minimum Credit Scores to qualify for conventional loans is 620 FICO.

How Credit Scores Affect Debt To Income Ratio Caps 

Credit Scores can also determine debt-to-income ratio limits on FHA loans. For borrowers with credit scores of under 620 FICO, the automated underwriting system may consider them at higher risk. The AUS algorithm may cap the debt-to-income ratio to 31% front-end and 43% back-end on lower credit score borrowers on FHA loans.

In general, statistics show borrowers under 620 credit scores will get an AUS approval at no greater than a 43% debt-to-income ratio while higher credit score borrowers will get up to 46.9% front-end and 56.9% back-end debt-to-income ratio approval.

Getting Approve/Eligible per AUS With Higher Debt to Income Ratio

In general, a higher debt-to-income ratio means higher-risk borrowers. The chances of a homeowner with a high debt-to-income ratio defaulting on their home loan is greater than a borrower with a lower debt-to-income ratio.

Borrowers with credit scores of 620 or higher, then they can have a maximum debt-to-income ratio cap limit of 46.9% front end and 56.9% back end to get an approve/eligible per the automated underwriting system.

Debt To Income Ratio Guidelines on Manual Underwriting

Borrowers with higher debt-to-income ratios will need to make sure that they boost their credit scores to over 620 FICO. Manual underwriting guidelines on FHA and VA loans cap debt to income ratio as follows:

• 31% front-end and 43% back-end debt-to-income ratio with no compensating factors
• 37% front-end and 47% back-end debt-to-income ratio with one compensating factors
• 40% front-end and 50% back-end with two compensating factors

The above debt-to-income ratio cap is just recommended guideline by HUD and the VA. Mortgage Underwriters can surpass the above DTI recommended caps on manual underwriting if they feel the borrower has strong compensating factors. Underwriters have a lot of power and underwriter discretion on manual underwrites.

Credit Scores Fluctuations During Mortgage Process

Credit Scores do fluctuate daily. There are tricks of the trade where a borrower can maximize their credit scores. Maxed-out credit cards will plummet a consumer’s credit scores. The good news is that the drop in credit scores on maxed-out credit cards is not permanent. Consumers’ credit scores will instantly go back right up once they pay down their credit card balances.

Home Buyers should consider paying down all of their credit card balances before applying for a mortgage loan. Lower balances can have the best and highest credit scores possible when their mortgage loan originator pulls their credit.

Does Credit Card Usage Affect Mortgage Approval?

A high credit card balance will lower credit scores during the mortgage process. Worried about credit scores dropping during the underwriting process? No need to worry. Many mortgage loan borrowers often question which credit scores mortgage lenders will use to qualify them for a home loan. This is because credit scores always fluctuate. As mentioned earlier, your credit card balance will cause volatility in your credit scores. A maxed-out credit card will definitely plummet consumer credit scores. Borrowers should not be worried about credit score changes during underwriting process because the original credit score is used and is valid for 120 days.

How Paying Down Credit Card Balances Will Skyrocket Credit Scores

If you have five maxed-out credit cards and pay those five credit card balances off, you can easily boost your credit scores by over 100 FICO points just by paying down your credit card balances. It is highly recommended that you pay down all of your credit card balances to 10% of all of your available credit limit for you to get the best possible credit scores possible. Prior to applying for a home loan, make sure that you pay down all of your credit card balances. Whenever loan officers pull credit, it is normally a hard credit inquiry. Each hard credit inquiry will drop credit scores by at least two to five FICO points.

Which Credit Scores Do Lenders Use To Qualify Borrowers

The credit scores mortgage lenders use is the middle of the three credit scores. There are three credit reporting agencies:

1. TransUnion
2. Experian
3. Equifax

Lenders pull credit from all three credit bureaus. It is called a tri-merger credit report. Lenders are well aware of credit score changes during underwriting process. They will use the middle of the three credit scores of the tri-merger credit report. The credit score used to qualify will be used throughout the mortgage process.

How Do Lenders Determine The Qualifying Credit Score For Borrowers

The best way to illustrate how mortgage lenders determine the qualifying credit score on borrowers is to show by an illustration and case scenario. For example, here is how lenders use a borrower qualifying score:

• may have a 500 FICO credit score on TransUnion
• 600 FICO credit score on Experian
• 700 FICO credit score on Equifax
• The middle credit score is a 600 FICO credit score of Experian
• So that credit score will be used throughout the mortgage approval process

With Credit Score Changes During Underwriting Process How Long Is The Initial Credit Score Valid For?

This credit score will be valid throughout the whole mortgage underwriting process:

• The credit report submitted and credit scores used to qualify the borrower is valid for a period of 120 days or 4 months
• If the mortgage approval process gets extended beyond 120 days, a new credit report will need to be pulled

The new credit score that comes out will be used to qualify the mortgage borrower and the old credit score will no longer be valid.

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. Mortgage lenders will pull your credit more than once during the home mortgage process. Lenders will pull the initial tri-merger hard pull to qualify borrowers. They will pull credit prior to a clear to close.

What If My Credit Scores Drops After The Clear To Close?

Credit score changes during underwriting process are expected. Credit scores definitely fluctuate and credit score changes during underwriting process can happen daily. No need to worry. The original credit score is used until the loan closes and is valid for 120 days. Mortgage underwriters can pull credit again during the mortgage process if they need to. Normally credit pulls during the mortgage process are soft pulls. Refinancing borrowers should be especially careful.

Original Credit Score Used For Mortgage Approval Expires in 120 Days

Borrowers should be aware of credit score changes during underwriting process and scores can drop. The original credit score used to qualify borrowers is valid for 120 days. After 120 days, the lender needs to pull a tri-merger credit report and use the new updated middle credit score. If the updated new credit score changes during underwriting process are lower than the expired score, the lower score will be used.

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. Keep in mind how credit changes during underwriting process and how it can impact mortgage rates.  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. 

How Mortgage Rates Can Be Affected By Credit Score Changes During Underwriting Process

If the credit scores of borrowers drop during the mortgage process, it does not matter. This is because the initial credit scores that were submitted with the mortgage loan application to the mortgage processing and underwriting will be the credit scores that will be used throughout the entire mortgage loan process. It will be a problem if credit scores dropped during the underwriting process if the borrower decides to change mortgage lenders during the mortgage process. This holds true because the new lender will need to re-pull the borrower’s credit and the new credit report and credit scores will be used.

On the flip side, if credit scores have increased during the mortgage approval process, borrowers can use the new higher credit scores for locking in a better interest rate. Not all lenders allow this. However, we allow the higher credit score to be used to lock in a better mortgage rate.

There are many lenders that do not allow borrowers to use the higher credit scores and replace them with the lower credit scores that were submitted with your original mortgage loan submission. We do allow it at Gustan Cho Associates.  If you have any questions, contact and discuss them with the mortgage loan originator or call us at 800-900-8569 or text for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays.

This blog on credit score changes during underwriting process was updated on November 3rd, 2022.