What Happens if Your Credit Changes Before Closing?

Do Lenders Check Your Credit Again Before Closing?

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. To that end, try to refrain from making major charges on your credit cards or taking out new credit as it could disrupt the mortgage approval process.

Lenders check your credit before closing to ensure your financial situation hasn't significantly changed since your initial home loan preapproval. They want to verify you still meet their mortgage credit requirements and look for any new risks that could impact your ability to repay the loan. Remember, lenders' primary focus is on minimizing potential risks to protect themselves, so the purpose of the second credit check is to look for any new information that could threaten the repayment of the loan.

How Changes to Your Credit Can Affect Your Mortgage Closing

A drop in your credit score prior to closing can cause a lender to change your loan rate and terms or, worse, reject your mortgage. Here are some ways a credit change could negatively impact your mortgage closing:

• Insufficient credit score: If your credit already borders on your lender's minimum credit score requirement, a substantial score drop could leave you short of the threshold and jeopardize your loan approval. In such cases, exercise good credit habits―or don't use your credit at all―during the closing process to maintain your eligibility for the mortgage.
• Debt-to-income ratio (DTI) too high: Before approving a mortgage, lenders want to ensure you don't already have more debt than you can afford. Consequently, lenders evaluate your debt load by looking at your debt-to-income ratio. Your DTI measures how much of your gross monthly income goes toward your total monthly debt obligations. A drop in your credit score or a new credit inquiry could signal a new debt that your lender will want to verify. If you have new debt that pushes your DTI above your lender's limit, it could affect your loan eligibility.
• Adverse effects on interest rates: Generally, the higher your credit score, the lower the interest rate you may receive on your home loan. Lenders want to recheck your credit score before closing to ensure you qualify for the rate approved during preapproval. As such, a decreased credit score could lead the lender to hike your loan's interest rate or change other terms.

Mistakes to Avoid When Closing on a Mortgage

Credit changes aren't the only factor that can threaten your closing. Improve your odds of a successful closing by avoiding the following common mistakes homebuyers make during the escrow period:

• Opening a new line of credit: Applying for new credit can negatively impact your credit score. As a result, this may affect your chances of loan approval or result in a lower interest rate.
• Making a large purchase: It's wise practice to use your credit cards sparingly during escrow. Certainly, don't use your credit card to make a large purchase. Adding to your credit card balance could impact your credit utilization rate, which measures how much of your available credit you're using. Credit utilization is one of the most important factors in your credit, and an elevated utilization rate can quickly result in credit score harm. A large credit purchase can also increase your debt-to-income ratio and potentially affect your mortgage loan eligibility.
• Failing to pay bills on time: Paying a bill late or missing a payment altogether, even if unintentionally, can jeopardize your loan closing and harm your credit score. Your payment history is the most important factor in your credit score, and the record of a late payment will stay on your credit report for seven years from the date of the delinquency. Play it safe by ensuring your bills are set for automatic payments to avoid any due dates falling through the cracks.
• Leaving your job: Stable employment and sufficient income are critical factors lenders consider when assessing your creditworthiness. As such, leaving your job or changing employment during the closing period may raise concerns with your lender about your ability to repay the loan. Similarly, a change in the type or frequency of your compensation could impact your loan closing. For example, switching from a salary position to a commission-based one could affect the stability of your income and potentially compromise your mortgage approval.
• Missing closing deadlines: During the escrow period, you must follow a strict schedule for submitting supporting documents, obtaining a home appraisal, securing home insurance and completing other tasks. Make it easier on yourself by asking your lender or real estate agent for a list of required documents and tasks, along with their respective due dates.

The Bottom Line

Changes to your credit score can delay your mortgage approval and threaten the successful closing of your home. Consider signing up for free credit monitoring from Experian to help ensure credit changes don't trip up the process. You'll receive notifications of any changes to your credit report so you can stay on top of your credit.

If you plan on buying a home soon, shaping up your credit beforehand may make sense. Check your Experian credit report and credit score for free to see where your credit stands. Carefully review your credit report for any inaccuracies or fraudulent information and take steps to improve your credit if necessary.