Three Credit Reports to Get a Mortgage?

November 27th, 2013

credit reports


A lender pulls three credit reports to issue a mortgage? Yes, potentially. One when you get pre-qualified. Then another at loan application, if loan application and settlement happens 120 days or more after pre-qualification. And then the third check is just before settlement! Yes, now Fannie Mae, Freddie Mac, FHA, and all the rule makers require lenders to check for credit activity just a day or two prior to settlement.

These institutions require lenders to monitor your credit right before settlement for new credit accounts and increasing credit card balances. Don’t use your credit cards for anything other than regular, small purchases, and don’t open new credit. Doing this may affect your debt ratios or your credit score. It may even stall, or stop, your settlement! I will illustrate in more detail using a few true stories.

Client Story #1:

I had a client who was so excited after loan approval that he decided to lease a new Mercedes Benz for over $1000 a month. This was after loan approval and prior to settlement. Think that caused a problem? Yes, a massive one. It took a lot of time to correct the situation.

Client Story #2:

I had another client buy over $20,000 of new furniture after loan approval and prior to settlement. This reduced his credit score. And it raised his debt ratio to an unacceptable level. This delayed the settlement for a week while I found a solution to make his loan work and get him approved again.

What should I do?

It seems the credit scoring formulas will penalize a credit score once a revolving credit card account exceeds 50% of its high limit. So in general, it’s good to keep your balances below 50% of their limits. Simply keep those balances as low as possible in general.

Let’s use a hypothetical scenario to illustrate this.

Assume a buyer has a 680 credit score, and their credit card has a high limit of $5,000 and a balance of $2,050 at pre-qualification. Let’s assume four months later they find a new home and go under contract. Then at loan application an updated credit report is pulled, and that balance is then $2,253. Then let’s assume they get their loan approval three weeks later. They assume they are now in the clear, so they buy new furniture and run the credit card up a bit. Let’s even say they only buy a $300 end table, and the balance is now $2,553. No problem right? Who doesn’t need a new end table? They have their loan approval, and they are planning the house warming party. What can go wrong? But wait!

The day before settlement the mortgage loan officer calls and tells the client that he/she is required to check their credit activity again. The one credit card that increased to just over 50% of its high limit has pushed the credit score down to 677. Your loan is not rejected. But the revised lower credit score means you have to take a higher interest rate because the loan program called for a minimum 680 credit score to get a certain level of interest rate. If your credit score gets pushed below the minimum level needed for loan approval, then you would really be in trouble!

Higher Credit Score = Higher Interest Rate

Potential Homebuyer Tips:

  • If a potential homebuyer is pre-qualified, they should try and freeze their finances at that level.
  • Even try to reduce debt and save more money to better their circumstances.

It seems many people want to get pre-qualified right to their maximum loan limits, and in this case increasing debt load even a small amount may throw off the pre-qualification numbers. When you are dealing with earnest money deposits and real estate contracts, credit score is not something to be taken lightly.

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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