Your Lender Might Do Another Credit Check Right Before Closing

Heads up home buyers: Your mortgage lender might check your credit reports and scores a second time, shortly before closing day. So it’s best to avoid any major financial transactions until after you close the deal.

Most home buyers realize that mortgage lenders do a credit check on the front end of the process, when the buyer first submits an application.

But some are surprised to learn that lenders often do another check right before the final closing.

It’s not an industry-wide standard, though. Some lenders do a follow-up credit inquiry, while others do not. It can vary from one bank or mortgage company to the next.

This guide explains why lenders check credit reports and scores in the first place, and why some of them do it again shortly before the borrower is scheduled to close.

Why Lenders Check Credit the First Time

Mortgage lenders almost always check a borrower’s credit reports and scores early on in the process, as part of the initial application and pre-approval. And sometimes they’ll do it a second time as well.

But let’s take it one step at a time.

Here are four reasons why a lender will check your credit in the first place:

1. Assessing Your Creditworthiness

Your mortgage lender wants to determine if you have a history of responsible credit usage. In other words, they want to know how you have borrowed and repaid money in the past.

All of this can be determined by looking at credit reports and scores.

A higher score indicates responsible borrowing and is therefore a lower risk to the lender. Borrowers with higher scores tend to have an easier time qualifying for loans and often get the best interest rates.

A lower score, on the other hand, represents a bigger risk and therefore a lower likelihood of loan approval.

2. Determining Loan Eligibility

Different types of home loans have different requirements when it comes to the borrower’s credit scores. Often, these requirements come from secondary organizations such as the Federal Housing Administration (FHA), Freddie Mac, etc.

During the application and pre-approval process, mortgage lenders review credit scores to make sure the borrower meets their own guidelines as well as those imposed by third-party organizations.

3. Setting the Interest Rate

Lenders also use credit scores to decide what interest rate to offer for a particular borrower. In industry jargon, this is known as “risk-based pricing.”

Higher credit scores usually result in lower interest rates, while lower scores might bring higher interest costs due to increased risk for the lender.

To be clear: Other factors can influence a borrower’s mortgage rate as well. These include the type of loan being used, the size of the down payment, and other factors. But the credit score plays a big role.

4. Evaluating the Debt-to-Income Ratio (DTI)

When you apply for a home loan, your lender will probably measure your debt-to-income (DTI) ratio. This ratio shows how much of your income is going toward your recurring debts.

Mortgage lenders use DTI ratios to make sure a borrower can afford the monthly payments on a home loan, in addition to all of their other existing debts.

Credit reports provide a detailed list of a borrower’s existing debts. This can include credit card balances, car loans, student loans, personal loans, and other outstanding accounts. Lenders use this information to calculate the total monthly debt obligations and the overall DTI ratio.

These aren’t the only reasons why lenders review credit scores during the application stage. But from a borrower’s perspective, the four points above matter the most.

Why They Might Do It Again Before Closing

To recap: your lender will almost certainly check your credit up front, when you first apply for a loan. And they might do a second time around, a few days before you are scheduled to close.

But why? If they’ve checked it once and were satisfied enough to move forward with the process, why would they need to do it again?

In short, they do it to make sure nothing has changed significantly that might affect your ability to repay the loan.

According to the credit reporting bureau Experian:

“Yes, lenders typically run your credit a second time before closing, so it’s wise to exercise caution with your credit during escrow. One of your chief goals during escrow should be to ensure nothing changes in your credit that could derail your closing.”

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Let’s drill down on this subject. Here are five reasons why your lender might run a second credit check:

1. Confirming No Major Changes

The period of time between mortgage pre-approval and final closing can last for several weeks or even months. And a lot could change during that timeframe, from a financial standpoint.

Mortgage lenders often run a second credit check to make sure the borrower’s financial situation hasn’t significantly changed since the initial application. They might look for new debts, late payments, or other issues that could affect the borrower’s ability to repay the loan.

2. Verifying Credit Score Accuracy

Sometimes, credit reports can contain errors or outdated information. A second credit check allows lenders to verify the accuracy of the initial report and ensure they’re using the most up-to-date information to finalize the loan terms.

3. Checking for New Inquiries

When a borrower applies for other loans or credit cards after being pre-approved for a mortgage loan, it raises a red flag. It suggests that the person might be over-relying on credit, perhaps due to financial mismanagement.

It can also change the borrower’s debt-to-income ratio, which we talked about in the previous section. Additionally, multiple credit inquiries in a short period of time could lower a person’s score.

The takeaway: Mortgage lenders use the first credit check to determine borrower eligibility and assign the interest rate. And they’ll sometimes do a second check prior to closing to make sure nothing significant has changed that could affect the loan approval.

Getting Approved and Staying Approved

Once you’ve been pre-approved for a mortgage loan, you’ll want to do everything you can to stay approved. You’re not home free until the underwriter reviews the file and gives the “clear to close” signal.

So it’s best to play it safe in the meantime.

Here are some things to do and avoid between the initial application and the final closing.

• Avoid Major Purchases: Purchasing big-ticket items like cars, furniture, or appliances could alter your debt-to-income ratio, especially if you finance those purchases. This could potentially jeopardize your loan approval.
• Don’t Change Jobs: Lenders prefer stability when it comes to employment and income. Changing jobs could raise concerns about income consistency and your ability to repay. So try to maintain the status quo during the loan process, if possible.
• Limit Credit Inquiries: Applying for new credit cards or loans could negatively impact your credit score. It’s generally best to avoid unnecessary credit applications during this time.
• Pay Bills on Time: Late payments can harm a credit score more than any other single factor. So be sure to pay all of your bills on time leading up to and during the mortgage underwriting process.

Disclaimer: This guide contains general information that might not apply to all borrowers. It is not meant to take the place of financial guidance. If you have questions or concerns about credit checks during the mortgage process, talk to your lender about it up front.