How Credit Score Changes During The Underwriting Process Affect Mortgage Loan Approval
How Credit Score Changes During The Underwriting Process Affect Mortgage Loan Approval
There is no doubt that credit scores fluctuate during the underwriting process. However, the most troubling concern on the minds of mortgage loan applicants and credit card users is:
“What Happens If Credit Score Changes During The Underwriting Process.”
Mortgage loan applicants often ask themselves this question. The answer, however, is not so easy as it seems.
Thus, in this article, I will discuss in detail what effect credit score changes have on the underwriting process and other related issues.
NOTE: This article is a very lengthy one. Hence, make sure you use the Table Of Content and scroll down to the subtopic of interest.
What Happens If Credit Score Drops During The Mortgage Underwriting Process?
When your credit score drops during mortgage underwriting, it may or may not affect your eligibility for the loan.
This is because, besides your credit scores, Mortgage lenders consider your income history, payment history and debt-to-income (DTI) ratio, among others, when determining your qualification for a loan.
Hence, as long as your income and debt-to-income ratio are substantial in value, you are a bit safe.
However, one thing is for sure: a drop in your credit score would only hurt the likelihood of your mortgage loan approval if:
- The drop in your credit score is numerically significant.
- Your credit score decline indirectly results from a job loss.
- Your credit score drop results from your inability to pay up your credit balances or due to a missed credit payment.
If that’s the case, then you can contain its effect on your mortgage loan approval by taking the following steps:
- You can delay or pause your loan and fix your credit score first.
- You can switch to a different loan program whose requirements fit your current financial (credit) condition.
- You can discuss the possible options or alternatives with your mortgage lender and settle on the best course of action.
On the other hand, a drop in your credit score may not hurt the chances of your mortgage loan approval if:
- The drop in your credit score is merely a typical credit score fluctuation.
- The credit score decline is trivial or not materially significant.
What Happens If Your Credit Score Increases During The Mortgage Underwriting Process?
Suppose your credit score increases during the mortgage underwriting process for a loan. In that case, such boost in your credit score may improve the chances of your mortgage loan approval and provide you with a better interest rate.
However, mortgage lender typically pull borrower’s credit report every 120 days. Hence, If your mortgage loan closes within 120 days, your mortgage lender may never consider the increase in your credit score.
The best way to benefit from an increase in your credit score during the underwriting process is to lock in your interest rate when your credit score is high.
However, you can only lock in your interest rate at a particular credit level and for a certain period. Thus, if your credit score increases during this “period”, and that increase falls within the “credit level,” you may be able to lower your mortgage rate.
Unfortunately, most mortgage lenders won’t allow you to refinance your mortgage rate when your credit score improves during underwriting.
On the other hand, some mortgage lenders will only allow you to reprice your mortgage rate for a lower interest rate for a fee.
Hence, you would have to weigh your options and decide which course of action is best for you.
Also, mortgage lenders will consider other factors, such as your income, employment history, and debt-to-income ratio, to approve your mortgage loan application.
For this reason, an increase in your credit score may not necessarily guarantee approval.
What If My Credit Scores Drop After A “Clear To Close”?
One thing is sure: the credit score fluctuates during the mortgage and underwriting process. It’s not stable. There will always be tiny increases or decreases in its value.
As a result, for a credit score decline to ruin your mortgage loan approval or terms of the loan, it must have dropped significantly.
To ensure your credit score does not decline significantly, you must avoid making big purchases with your credit cards, such as a new car loan, a significant home renovation, etc.
But then, If your credit scores drop significantly after you receive a clear to close, kindly discuss with your lender as soon as possible.
Together, you can renegotiate the loan terms, postpone the closing until your credit score increases or, better still, consider your options.
What Does “Credit Refresh Before Closing” Mean?
“Credit refresh before closing,” in simple terms, means a lender is requesting for more recent credit information on the borrower before closing on the loan.
A “credit refresh before closing” ensures the borrower’s credit profile has not changed significantly since the previous check.
There are a few other reasons why a lender may request a “credit refresh before closing”:
- To verify if the borrower meets the lender’s credit requirements.
- To verify if the borrower has not taken on additional debt.
Suppose a lender requests a credit refresh before closing. In that case, the borrower should cooperate and promptly provide the necessary documentation. Failure to do so could delay the closing or prevent the mortgage loan approval.
Should I Pay Off Debt During The Underwriting Process And Before Closing On A Loan?
Paying off as much debt as possible during the underwriting process and before closing on a loan is an excellent idea, as it increases your mortgage loan approval chances.
This is because a significant debt overload can negatively influence your credit score and hurt the chances of your mortgage loan approval.
Additionally, a high debt load can negatively affect your monthly mortgage payments, increasing the risk of default.
By paying off as much debt as possible before closing on a loan, you can improve your credit score, decrease your debt-to-income ratio and qualify for a better mortgage rate and a suitable loan program.
Will A New Credit Card Affect My Mortgage Loan Application?
Yes, it might. Opening and swiping a new credit card can ruin the chances of your mortgage loan approval.
This is because lenders typically review your credit history, payment history, employment history, and credit score, among others, to assess your qualification for a mortgage loan.
Opening a new credit card can damage your credit score, and in turn, ruin your mortgage loan application.
Here are the following ways a new credit card can ruin your mortgage loan application:
- First, opening and using a new credit card heavily will drastically increase your credit utilisation ratio (that is, the ratio of your credit usage to the amount of credit you have available).
As a result, a high credit utilisation ratio can damage your credit score, hurting your mortgage loan approval.
- Second, opening a new credit card with little or no credit history can ruin your credit score. Moreover, since mortgage lenders consider your credit payment history part of their verification process, your chances of receiving a mortgage loan are slim to none.
All in all, it’s best you avoid applying for new credit cards or making significant changes to your credit history during the mortgage loan application process.
Will An Increase In My Credit Limit Affect My Mortgage Loan Application?
Yes, It might. An increase in credit limit can induce positive and negative effects.
For example, when your credit limit increases, but you choose not to increase the amount owed on your credit card, your credit utilisation ratio plunges, positively impacting your credit score.
And with an increase in your credit score, among others, your mortgage loan is more likely to be approved.
On the other hand, if your credit card usage increases alongside your credit limit, your credit utilisation ratio is more likely to remain the same or decrease drastically.
And this can ruin your credit score and the chances of your mortgage loan approval.
Overall, the impact of an increase in your credit limit on your mortgage loan application would depend on how that increase influences your credit score, overall loan qualification, debt-to-income(DTI) ratio, and so forth.
Does Credit Card Usage Influence Mortgage Loan Approval?
Credit card usage can influence mortgage loan approval. This is because lenders consider credit cards used when determining which borrower is worthy of a loan.
Ideally, Mortgage Lenders typically examine a borrower’s credit history and credit score to determine their creditworthiness and risk of default.
And this, in many ways, positively influences the approval of the mortgage loan.
Overall, borrowers should use credit cards responsibly and clear their credit card balances every month. This way, they can improve their credit score and increase the chances of their mortgage loan being approved.
Can I Use My Credit Card Before The Closing Date On The Loan?
You can. But it’s not a great idea.
In general, using your credit card before the closing date of a mortgage loan can be disastrous.
Typically, mortgage lenders and underwriters examine a borrower’s credit history, payment history and credit score as part of the underwriting process.
Hence, any significant changes to your credit profile, such as car loans, major home renovations, etc., would affect your loan approval.
For example, if you use your credit card for a large purchase before the lender closes on the loan, there will be an increase in your credit card balance and this will, in turn, lower your credit score.
And as a result, this influences the worth of the mortgage loan approved and the terms of the mortgage loan.
Overall, the best choice is to avoid accumulating additional debts or making a large purchase with your credit card before closing on a loan.
However, if you need to do so, kindly discuss with your lender what steps you should take.
Will An SBA Loan Affect The Mortgage Loan Approval?
First, a Small Business Administration (SBA) loan is a small business loan whose goal is to provide financial assistance to small business owners.
The likelihood of an SBA loan influencing the mortgage approval depends on the borrower’s creditworthiness and the type of mortgage loan sought by the borrower.
For instance, if you are a beneficiary of an SBA loan and are currently seeking a considerable mortgage loan to purchase a home, the mortgage lender will most likely consider the SBA loan as part of your overall debt load.
Also, the terms of the SBA loan, such as the monthly payments, interest rates and many more, will be considered.
SBA loans may or may not affect your mortgage loan approval.
Suppose you have a good credit score, a good income, a low debt-to-income ratio and a great credit payment history. An SBA loan is unlikely to influence your mortgage loan approval negatively.
On the other hand, with a high debt-to-income ratio, a low credit score, uncertain income, and payment history, an SBA loan could ruin the possibility of your mortgage loan approval.
Preferably, if you have any concerns about how an SBA loan may affect your mortgage approval, you should speak with your mortgage lender.
Do Mortgage Lenders Pull Credit Before Issuing A “Clear To Close”?
Yes. Mortgage lenders pull a borrower’s credit before issuing a “clear to close” on a mortgage loan.
Essentially, a “clear to close” is the lender’s signal to the borrower that all mortgage underwriting and loan approval requirements have been met, and the loan is ready to close.
For the lender to issue the clear-to-close letter, it typically extracts the borrower’s credit report, income, employment history, and other financial information to verify the borrower still meets the loan’s requirements.
For example, if you acquired a new credit card and used it heavily during the underwriting process, that would harm your debt load, decrease your credit score and hurt your eligibility for a mortgage loan.
The mortgage lender may also pull the borrower’s credit again on the day of closing to verify if the credit report is void of any significant changes, as it plays a massive role in the mortgage loan approval.
Do Mortgage Lenders Pull Credit After A “Clear To Close”?
Mortgage lenders still pull and review a borrower’s credit after issuing a clear to close on a mortgage loan.
Once a lender issues a “Clear To Close,” it signals that the lender has reviewed and approved the borrower’s credit. But then, that’s never the end.
After you have been cleared to close, the mortgage lenders will review your credit report, income and employment history, among others, one last time.
The purpose of this is to make sure you still meet all the loan requirements.
A loss of employment or a demotion at your place of work could affect your loan eligibility, even after you have been issued a “clear to close”.
When Do Mortgage Lenders Pull Credit Scores During The Underwriting Process
Mortgage lenders typically pull a borrower’s credit report multiple times during the underwriting process and before closing the loan.
But as for the exact timing your credit scores are pulled, several factors, such as the type of mortgage lender and loan programs, play a role.
Early on in the underwriting process, mortgage lenders pull a tri-merger credit report from the three major credit bureaus:
- Equifax and
This type of credit pull is called a “hard pull.” This is because the mortgage underwriter pulls all your credit information, including your credit payment history, employment history, income history, credit card usage history, and credit score.
By the way, the credit score used by your mortgage underwriter is the intermediate (middle) credit score.
Right before closing or on the closing day, mortgage lenders pull your credit again.
But then, at this point in time, the credit pull is a “soft credit pull,” as this is more of a verbal verification.
However, your Initial Credit Report (the first, hard credit pull) determines your official Credit Score, your mortgage’s interest rate and your loan eligibility.
And the Initial Credit Report is valid for 120 days. Once the 120 days elapses, another credit report is pulled, and this becomes the official credit score for the mortgage loan.
Which Credit Scores Do Lenders Use To Determine Borrowers’ Loan Eligibility?
Lenders consider one or more credit scores when determining a borrower’s eligibility for a loan and the mortgage loan terms (e.g. the interest rate).
Credit scores are one of the most critical metrics lenders consider when determining the creditworthiness of a loan. Other metrics include the payment history, the income history of the individual and so forth.
To begin with, Credit scores quantify a borrower’s creditworthiness and credit risk based on the information in their credit reports.
The most widely used credit scores come from three major credit bureaus:
Mortgage Lenders pull your credit scores from all three Credit Bureaus. This is known as a tri-merger credit report.
But then, the three credit scores are not used at a time. Only the credit score between the highest and lowest is considered. And this is the middle score.
For instance, if your credit scores were pulled from the three main credit bureaus. And they are as follows:
- 600 Credit Score on TransUnion
- 700 Credit Score on Equifax
- 900 Credit Score on Experian
The Credit Score considered for determining your eligibility for the loan and the terms of the loan, in this case, would be the 700 FICO Credit Score from Equifax.
This is because it is the middle score.
The three major credit bureaus use their unique scoring models to calculate credit scores, so a borrower’s credit score may vary slightly depending on which credit bureau’s score is used.
For example, Equifax uses the BEACON score, Experian uses the FICO score, and TransUnion uses the VantageScore.
In general, Lenders may use one or more of these credit scores to determine a borrower’s creditworthiness and risk.
How Long Is The Initial Credit Score Valid?
The initial credit score is valid for only 120 days or four months.
Hence, if the loan closes within 120 days after your initial credit report is pulled, your lender will not have to draw another credit report. And the initial credit report will remain the official credit report for your loan application.
Generally, credit scores are valid for only 120 days because credit scores are based on the information in your credit report. And this is subject to constant change.
As a result, your credit score can change monthly as further information is added to your credit report.
How Many Days Before Closing Is My Credit Pulled?
Mortgage lenders typically pull a borrower’s credit report few days before closing the loan.
But then, there is no fixed timing or number of days, as it can vary based on several factors.
Typically, lenders pulls your credit within seven days before closing. And the type of credit pull, which occurs right before a loan closing, is called a “soft credit pull.”
The credit pull’s sole aim is to verify that the borrower’s financial situation has not changed since the loan was approved.
It is very rare for mortgage lenders to reverse the loan in this phase unless there is a significant addition to your debt load, a recently missed payment or a discovery of a new yet enormous credit such as car loans, and so forth.
What Do Mortgage Underwriters and Lenders Look Out For In Your Credit Report Before Closing On A Loan?
Before closing a loan, mortgage underwriters and lenders typically consider a few criteria. This aim of this thorough audit is to determine whether the borrower is a good credit risk and worthy of a mortgage loan.
Mortgage underwriters and lenders typically consider the following factors:
- Borrower’s credit score,
- Credit payment history,
- Income and employment history,
- Assets, Liabilities, and other financial information.
- Credit Utilization Ratio
- The nature of the to-be-purchased property.
- Debt-To-Income Ratio
- Accuracy of the Credit Information Provided During The Mortgage Loan Application
- Debts resulting from new credit cards
And many more.
However, it’s essential to know that the specific factors taken into account differ depending on the mortgage lender and the type of loan program sought.
How Can I Know If My Mortgage Loan Will Be Approved?
For those of you who are anxious about the results of your mortgage loan application, below are a few signs your loan may be approved:
- A Good Credit Score
Lenders typically examine your credit score to determine your creditworthiness and ability to repay a loan within the set timeframe. Your loan will likely be approved if you possess a high credit score.
- A Stable Income and Employment History
Mortgage Lenders consider borrowers with a regular income and a steady employment history above others who do not. This is because borrowers with consistent and stable incomes are more financially stable and less likely to default on their loans.
- A low Debt-To-Income Ratio
Your debt-to-income ratio estimates how much debt you hold compared to your income. As a result, mortgage lenders highly rate borrowers with low debt-to-income ratios, showing you can keep your debts under control and repay your loan faster.
- A Substantial Down Payment
A vast down payment substantially improves the likelihood of your mortgage loan approval. This is because dropping a down payment shows how serious you are, reduces the amount of the loan required and how financially responsible you are.
In the end, the best way to ensure your mortgage loan approval is to speak with your lender about your situation and what action you should take. This is because the requirements for a loan vary depending on the lender and the needs of the loan program being applied for.
How Close Is Underwriting To Closing?
Underwriting is one of the final steps in the mortgage process. And It takes place just before closing.
Early in the mortgage process, the borrower completes the loan application and provides all necessary documentation.
After the borrower has provided the necessary information, the lender begins the underwriting process, which takes place shortly before closing.
The underwriting process entails a detailed review of the borrower’s financial situation to assess their ability to repay the loan within a particular time frame.
The proximity of underwriting to closing, however, varies depending on several other factors, such as the complexity of the loan program and the number of loan documents being reviewed by the mortgage underwriter.
In general, however, underwriters and lenders complete the underwriting process within three to seven days.
Once the loan officer finalises the underwriting process, the lender issues a “clear to close” (CTC) on the loan.
“Clear to close” implies that the borrower meets the requirements for the loan.
Overall, the underwriting process is very close to closing, as it is one of the concluding steps in the mortgage process.
What Is Considered A Big Purchase During Underwriting?
A big purchase during underwriting is any significant and huge expense you (the borrower) make while the lender reviews your creditworthiness for the loan program.
A big purchase on a credit card can be a massive home renovation, a down payment on a new vehicle, a down payment for a major surgical operation, excessive spending on frivolities, and so forth.
These types of significant expenses are a source of concern for mortgage lenders. This is because they indicate the borrower may be highly impulsive. And as a result, they will fall short in their ability to repay the loan.
Also, a large purchase on your credit card could decrease your debt-to-income(DTI) ratio and increase your credit utilisation ratio, which is a red flag to your lender.
Ideally, borrowers who have made significant purchases during the underwriting process are less likely to carry out their monthly instalments.
Hence, avoiding large purchases during the underwriting process is most reasonable. However, if you need to make a significant purchase, kindly discuss the best course of action with your lender.
How Do Underwriters Make Judgements?
Underwriters are finance professionals hired mainly by lenders to evaluate a borrower’s eligibility for a loan.
Underwriters determine whether to provide a loan to a borrower based on the specific requirements of that particular loan program.
Underwriters make decisions based on specific criteria, including credit scores, financial statements, employment history, medical records, etc.
Mortgage underwriters use this information to determine the likelihood of the borrower repaying the loan.
They may also leverage statistical models, actuarial tables and other tools to make these assessments.
Is No News Good News During The Underwriting Process?
You may not hear from the mortgage lender or underwriter for some time during the underwriting process.
However, contrary to what many people think, this does not indicate your loan application has been rejected.
But then, no news isn’t necessarily good news as well.
Below are the few things no news may imply:
- A lack of news may imply that the underwriters have several loan applications to review and analyse.
- No news may imply that the mortgage underwriters need additional information or clarification on specific points.
If you’re unsure of the status of your loan request, it’s best to contact the underwriter or lender to inquire about the status.
By doing so, lenders and underwriters can then update you on where things stand and what further data is needed to speed up loan approval.
Bottom line: stay in touch with your mortgage underwriter or lender.
Should I Be Worried and Anxious About The Underwriting Process?
It is natural to feel some level of anxiety or concern during the underwriting process for a loan.
This is because there is often a lot at stake if it isn’t approved. However, staying calm and approaching the underwriting process rationally is the best step.
You can reduce the anxiety associated with underwriting by following these steps:
- Make sure you have submitted all the necessary documentation and are aware of any additional documents that the lender or underwriter may require.
- Ensure you are conversant with the loan program’s requirements. Once you know the loan’s requirements and do as told, you will feel at rest, knowing that you have ticked all the boxes.
- Ensure you stay in touch with your lender or underwriter. Regularly communicating with your lender or underwriter will help you anticipate potential problems and clarify what is sponsoring anxiety. So, if you have questions or concerns, ask the lender or underwriter for clarification. This would help alleviate your stress and anxiety.
- Lastly, ensure you keep things in perspective. As long as you have done what is expected of you, there should be no reason for anxiety or worry. Remember, the lender or underwriter is only trying to evaluate your eligibility and determine the most suitable terms for the loan.
So, once you have satisfied the requirements spelt out by the lender and clarified any concerns regarding the loan program, you are good to go. You have no reason to worry.
Ways To Protect Your Credit During The Mortgage Process
There are several ways you can protect your credit during the mortgage and underwriting process:
Pay your credit bills on time
Late payments can ruin your credit score. Hence, ensure you pay your bills on time to protect your credit score from further harm. You can set up an automatic withdrawal from your monthly income for this purpose. Contact your credit card issuer for more information.
- Keep your credit card balances low
Leaving huge balances on your credit card can hurt your credit score in many ways. Hence, if you wish to protect your credit, keep your credit balances low relative to your credit limits and pay them up on time.
- Do not apply for new credit
New credits, such as a new car loan, or a new credit for a significant home renovation, have a way of hurting your credit score beyond repair.
As a result, try as much as possible to avoid applying for new credit during the application phase for a new loan and the underwriting process of a new loan.
- Avoid any new transaction on an old credit card
Any new transaction on an old credit card will revive a credit card. For this reason, it’s best to leave your old credit card dormant, as they are weighted less in credit scoring models. Also, make sure you make zero transactions on those credit cards (your old, dormant credit cards).
- Monitor your credit report
A statement by PR Newswire found that only 33% of Americans checked their credit reports in 2019.
This implies about two-thirds of the US population have no idea about the state of their credit report. Little wonder most people are unaware of how bad their credit situation is.
Hence, checking and monitoring your credit report from time to time is very important.
Receive a free copy of your credit report from each of the three major credit bureaus once a year at www.annualcreditreport.com.
- Seek help managing and protecting your credit:
Managing and protecting your credit from further harm can be difficult and time-consuming. And for those with day jobs and huge responsibilities, this is a lot harder.
As a result, if you belong to this category, you must seek help as soon as possible.
Fortunately, several personal finance management firms can help keep your finances on track. Explore them.
By following the steps above, you are more likely to experience a steady increase in your credit score and improve the chances of your mortgage loan approval.
How Do Credit Scores Affect My Debt-To-Income Ratio?
There is no direct causal relationship between credit scores and debt-to-income ratio. Your credit scores do not directly influence your debt-to-income ratio and vice versa.
But then, a correlation exists between your credit scores and your debt-to-income ratio.
Hence, a higher credit score indicates a larger debt-to-income ratio and vice versa. However, this is only the case sometimes.
Simply put, Debt-To-Income (DTI) ratio measures the percentage of your monthly income which goes toward paying your monthly debt. It is the ratio of your total monthly debt payments to your gross monthly income.
Mortgage Lenders will use DTI ratios as a criterion to approve a loan and at what terms.
The effect credit scores have on the Debt-To-Income ratio can be explained in a few words below:
Borrowers with higher credit scores are more likely to possess far excellent DTI ratios and a higher likelihood of loan approval than borrowers with lower credit scores.
Why May Fannie Mae Send Your Application Back To Underwriting?
Fannie Mae is a government-sponsored enterprise (GSE) that plays a vital role in the U.S. housing market by purchasing mortgages from lenders and bundling them into securities sold to investors.
If you are applying for a mortgage and your application is sent to underwriting by Fannie Mae, it means that Fannie Mae is considering whether to purchase your mortgage from the lender that originated it.
During the underwriting process, Fannie Mae will review your credit history, income, and assets to determine whether you are a reasonable credit risk.
Fannie Mae may also consider other factors, such as the value of the property you are purchasing, the size of your down payment, and your debt-to-income ratio.
If Fannie Mae finds out you meet its guidelines, it may buy your mortgage from the lender and bundle it into a mortgage-backed security, which is sold to investors.
If your mortgage application is sent to underwriting by Fannie Mae, it does not necessarily mean it will be approved. The underwriting process is designed to evaluate the risk of lending you money.
Fannie Mae may decide not to purchase your mortgage if the risk is too high. However, if Fannie Mae approves your application, it may help to increase your chances of obtaining a mortgage and getting a competitive interest rate.
In the end, we have discussed a lot about mortgage underwriting, the effect of credit score changes during the underwriting process and many more.
But then, what’s much more important is to apply the knowledge gained. On this note, I hope you apply all we have discussed and get your mortgage loan approved quickly. Stay tuned!
By the way, you can read more engaging articles on credit cards, NFTs and many more here.