Credit Scores Dropped During Underwriting Process
This Article Is About 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
- 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
- Credit Scores also determine debt to income ratio limits on FHA Loans
- Borrowers with credit scores of under 620 FICO, the maximum debt to income ratios normally allowed is 43% DTI to get an approve/eligible per AUS
- 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 automated underwriting system
- Borrowers with higher debt to income ratios will need to make sure that they boost their credit scores to over 620 FICO
Credit Scores Fluctuations During Mortgage Mortgage Process
Credit Scores do fluctuate daily and 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
- 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
Lower balance 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
- This is 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 consumer 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 pulls credit, it is normally a hard credit inquiry
Each hard credit inquiry will drop credit scores by at least two to five FICO points.
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:
Lenders pull credit from all three credit bureaus. It is called a tri-merger credit report.
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 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 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
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.
Credit Scores And Mortgage Rates Versus Qualification Of Borrowers
If the credit scores of borrowers drops during the mortgage process, it does not matter:
- This is 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
- This holds true because the new lender will need to re-pull 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 for a better interest rate. Not all lenders allows 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 it with the lower credit scores that was submitted with your original mortgage loan submission. We do allow it at Gustan Cho Associates.