What Happens If Credit Scores Drop During Mortgage Process

Gustan Cho Associates

What Happens If Credit Scores Drop During Mortgage Process

A mortgage loan borrower’s credit scores is what determines whether or not the borrower qualifies for a certain mortgage loan program.  There are minimum credit scores guidelines to qualify for FHA loans, Conventional loans, VA loans, USDA Loans, and Jumbo Mortgages.  FHA minimum credit score requirements to qualify for a 3.5% down payment home purchase FHA insured mortgage loan is 580 FICO.  Minimum credit score requirements to qualify for a conventional loan is a 620 FICO credit scores.  To qualify for a jumbo loan, minimum credit scores are 740 FICO. The key question is what happens if credit scores drop during mortgage process?

How Do Lenders Use Credit Scores

What happens if credit scores drop during mortgage process? How do lenders use credit scores? The credit scores a mortgage lender will use to qualify is the middle of the three scores.  For example, if the borrower has a 600 FICO Transunion Credit Score, 650 FICO Experian Credit Score, and 700 FICO Equifax Credit Score, the middle score is the 650 FICO credit score.  This middle credit score will be used for qualifying purposes.  If a mortgage loan borrower needs a conventional mortgage loan, this borrower will qualify for a conventional loan because the 650 FICO credit score he has is higher than the minimum 620 FICO credit score required to qualify for a conventional mortgage loan.  If there is a co-borrower on the mortgage loan application or a non-occupant co-borrower, then the lower of the two borrower’s middle credit scores will be used to qualify for the mortgage loan.  For example, lets say that the above borrower has a non-occupant co-borrower and the co-borrower’s middle credit score is 600 FICO.  The borrower’s middle credit scores are 650 FICO and the co-borrower’s middle credit scores are 600 FICO.  Since the co-borrower has the lower of the two mortgage loan borrower’s credit scores, the 600 FICO credit score will be used to qualify for the mortgage loan.  Under these circumstances, the borrowers will not qualify for a conventional mortgage loan since the 600 FICO credit scores will be used to qualify and the minimum credit scores required to qualify for a conventional loan is 620 FICO.  For these borrowers to qualify for a home loan, they would have to go with a FHA loan since the minimum credit scores required on a FHA loan is 580 FICO.

What Happens If Credit Scores Drop During Mortgage Process

The credit scores that will be used throughout the mortgage process is the initial credit scores submitted with the mortgage loan application.  Credit scores fluctuate up and down during the mortgage application and mortgage approval process and mortgage lenders realize this.  Mortgage underwriters will do soft pulls on the mortgage loan applicant’s credit during the mortgage application and mortgage approval process and will see that sometimes the borrower’s credit scores have dropped significantly or have increased.  No need for alarm.  The credit scores that will be used throughout the mortgage loan approval process until the mortgage loan closes is the original credit scores pulled when the mortgage loan officer has issued a pre-approval.  The credit report and credit scores are good for 120 days so as long as the mortgage loan closes within the 120 days of when the credit report was first pulled, the mortgage loan borrower should have no issues.  If for whatever reason the mortgage loan does not close in 120 days, then a new credit report needs to be pulled and the new credit scores at the time of the new credit check will be used.

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