Credit Scores Used For Mortgage Application Process

By Gustan Cho

Many mortgage loan applicants often get confused how credit scores are factored in during the mortgage application process.  Everyone has three credit scores from each of the major credit reporting agencies.  Equifax has their own credit scoring system, Experian has their own credit scoring system, and Transunion has their own credit scoring model.  Mortgage lenders all use the mortgage loan borrower’s middle credit score in qualifying the mortgage borrower.  For example, if the mortgage loan applicant has a Transunion credit score of 600, Experian credit score of 650, and Equifax credit score of 700, which credit score will the mortgage lender use?  The middle credit score and the middle credit score here is the 650 Experian credit score.

What If My Credit Scores Changes During The Mortgage Approval Process?

Credit scores change monthly depending on various factors.  If you max out your credit cards, your credit scores will most likely plummet. However, this drop is just a temporary drop and will go right back up once you pay down your credit cards.  If you are late on any of your credit monthly payments, your credit scores will suffer.  If you apply for too much credit, you will have hard credit inquiries on your credit report and your credit scores will most likely drop.  Each hard inquiry can have a 2 to 5 point negative impact on your credit scores.  Many mortgage loan applicants wonder what credit score a mortgage lender will base their qualifying credit score.  The credit score a mortgage lender will use will be the middle credit score that is pulled at the time the mortgage applicant signs the mortgage application and disclosures.

What If My Credit Scores Drop During The Mortgage Application Process

If a mortgage lender qualified you for a mortgage loan and you have submitted a mortgage application, the credit score that was pulled at the time of the mortgage application will be used throughout the mortgage approval process.  If you had a middle score of 650 FICO, that credit score will be used throughout the mortgage application process.  In the event your credit scores drop during the mortgage application process, it does not matter because the 650 FICO credit score will be used until you close on your mortgage loan unless that the mortgage closing takes over 120 days that your credit scores expires 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 and if they see that the mortgage loan borrower credit score has dropped, it is normally a non issue.  What they look for is if the mortgage loan applicant has not incurred more debt or had late payments where it will affect either the debt to income ratios and/or financial distress and the ability to repay the mortgage loan.  Many times when a mortgage loan applicant uses their credit cards and their credit utilization ratios are higher, then it is normal for the mortgage loan applicant’s credit scores to drop.  As long as it does not affect the debt to income ratio for their mortgage qualification, there should be no issues.

What If My Credit Scores Goes Up During The Mortgage Application Process

A mortgage loan applicant’s credit scores have a lot to do with which interest rates they get, especially with conventional loans.  Lets take a case scenario on how a mortgage loan applicant’s credit scores has an impact on a mortgage loan applicant’s mortgage rates.  The minimum credit score required to get a 3.5% down payment FHA mortgage loan approval is 580 FICO.  However, those with credit scores under 620 FICO will definitely get a higher interest rate on a FHA loan.  For example, if a mortgage loan applicant has a 580 FICO credit score, their interest rate might be at 5.5%.  If their credit score is between 600 FICO and 619 FICO credit score, their interest rate may be at 4.75%.  For mortgage loan applicants with credit scores of 620 FICO or higher, their credit scores may be at 4.25%.

Case Scenario

Let’s take a case scenario where a mortgage loan applicant had a middle credit score at the time he signed a mortgage application and got stuck with an interest rate of 5.5%.  During the mortgage application process, the mortgage loan applicant’s credit scores jumped to 640 FICO and with the 640 FICO the mortgage loan applicant can qualify for a 4.25% interest rate.  The mortgage lender cannot give the mortgage loan applicant a better rate and the mortgage applicant will be stuck with the 5.5% interest rate if he want to close his mortgage loan with this particular mortgage lender.  The only way a mortgage loan applicant can go for a better interest rate due to his sudden jump of his credit score is to cancel the mortgage application process with the current mortgage lender and apply with a different mortgage lender.  This can be done, however, on a purchase transaction, timing may be a problem.

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The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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