What If Credit Scores Dropped During Underwriting Process

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. If FHA borrowers have 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 credit scores. Credit Scores also determine debt to income ratio limits on FHA Loans. If FHA borrowers have credit scores of under 620 FICO credit scores, the maximum debt to income ratios allowed is 43% DTI. If FHA mortgage loan borrowers have credit scores of 620 FICO credit scores or higher, then they can have a maximum debt to income ratio cap limit of 56.9% back end debt to income ratio limit and a maximum of 46.9% front end debt to income ratio limit. FHA borrowers with higher debt to income ratios will need to make sure that they boost their credit scores to over 620 FICO credit scores.

Credit Scores do fluctuate daily and there are tricks of the trade where a borrower can maximize their credit scores. For example, if a mortgage loan borrower has maxed out credit cards, that will greatly negatively impact 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 and the consumer’s 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 so they can have the best and highest credit scores possible when their mortgage loan originator pulls their credit.

Impact If Credit Scores Dropped During Underwriting Process

Worried about if credit scores dropped during 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 because credit scores always fluctuate. As mentioned earlier, your credit card balance will cause volatility on your credit scores. A maxed out credit card will definitely plummet your 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 20% 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 a mortgage loan officer pulls credit on you, it is called a hard credit inquiry and each hard credit inquiry will drop your credit scores by at least two to five FICO points.

The credit scores mortgage lenders use is the middle of the three credit scores. There are three credit reporting agencies: TransUnion, Experian, and Equifax.  Mortgage lenders pull credit from all three credit bureaus and it is called a tri-merger credit report. For example, a borrower may have a 500 FICO credit score on TransUnion, 600 FICO credit score on Experian, and 700 FICO credit score on Equifax. The middle credit score is 600 FICO credit score of Experian so that credit score will be used throughout the mortgage approval process. This credit score will be valid throughout the whole mortgage underwriting process. The credit report submitted and credit scores used to qualify the mortgage borrower is valid for a period of 120 days or 4 months. If the mortgage approval process gets extended beyond the 120 days, a new credit report will need to be pulled and 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.

If the credit scores of the mortgage loan borrower drops during the mortgage process, it does not matter because the initial credit scores that was 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 underwriting process if the borrower decides to change mortgage lenders during mortgage process because the new mortgage lender will need to repull the mortgage borrower’s credit and the new credit report and credit scores will be used. On the flip side, if your credit scores have increased during the mortgage approval process, you cannot use the higher credit scores and replace it with the lower credit scores that was submitted with your original mortgage loan submission.

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.

6 Comments

  1. Amanda says:

    My credit score was pulled on April 6 2016 for an fha mortgage thru a bank. I needed a 600 and I had a 608. So your saying even if my score drops below 600 during underwriting I will be ok? Because my score is valid for 120 days? I have always heard they pull your credit again prior to closing? Very anxious!!!!

    • Gustan Cho says:

      All you need is a 580 FICO credit score to qualify for a FHA Loan with me. Most banks have lender overlays and even though FHA Guidelines are 580 FICO credit scores to qualify, they may require a credit score of 640 FICO or higher. If your bank will approve you with a 600 FICO credit score and your loan was submitted with that credit score, you do not have to worry about your credit scores dropping. Your bank will pull credit before you close on your home loan, however, it will be a soft pull and the drop of your credit scores will not matter. However, if you purchased something or you had late payments or new credit show up, it will matter. Feel free to call me anytime at 262-716-8151 or you can text me at this number or you can always email me also at GLCProperties@aol.com. Feel free to join our forum at http://www.lendingnetwork.org as well.

  2. Amanda says:

    Thank you very much! DO you know if you were ever late with a payment for several months and they never reported it to your credit and your now current . It’s showing it was always on time. It was actually a cc payment where I got behind but still paid something everymonth. Because they go forward not backwards…..Almost like paying less than the minimum it was never reported late and now I’m current on balance. Can they change it on my report or would they have already if they were going to?

    • Gustan Cho says:

      I would not tell them anything. I they can always change it but just make sure you make timely payments and pray they will not report it late. If you have proof that you made payments on time for the past 12 months, I think that you will be safe.

  3. CJ says:

    A loan I had was purchased by another lender about 4 months ago. During this time I fell behind on payments, change banks, and have been trying to locate who the loan belongs to. I have just recently gathered all of that information and only two payments behind, but they are going to give me a deferment on two of my payments because of the mix up. so, during this time, we were preapproved for a mortgage, have an accepted offer we made, paid for all of our inspections, and are waiting on the appraisal. The loan is currently at the underwriters. I just received a notification for credit Karma that I took a 70 point hit on my credit score because the new loan owner filed that I was 60-90 days late on payment, but it shows no late payment dates. I don’t want this to stop our loan from being approved as we have a lot invested thus far. With being preapproved, will this affect the loan outcome? i have a bad credit history from an ex-wife, but my wife and I barely qualified for my VA loan and don’t want to lose this opportunity because of a mistake I had no control of.

    • Gustan Cho, NMLS 873293 says:

      Lenders will use the original credit scores that was submitted with your loan submission and that credit score is good for 120 days. However, mortgage lenders will do a soft pull on your credit to see if you incurred any debt. I would contact the lender that reported you delinquent and talk to the manager and see if you get it resolved. As long as you have something in writing about the deferment, you should be fine. If your lender that you reported you late agrees to remove the late, your loan officer can do a rapid rescore and call the credit reporting vendor, like Credit Plus, and Credit Plus will have you on the phone along with the lender that reported you late and as long as the lender that reported you late agrees that the late is an error, they will have it removed off your credit report.

      Gustan Cho NMLS 873293
      Commercial & Residential Mortgage Consultants
      The Gustan Cho Team
      Gustan Cho Associates
      Website: wwww.gustancho.com
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      Toll Free: 800-900-8569
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