The final hurdle in getting the house you want is making it to closing and signing the necessary paperwork, so you can get the keys to the front door. You've proven yourself credit worthy and given the lender every indication that you're capable of making payments on time on a new loan. In between qualifying you for a loan and completing underwriting, the lender may make one final check to see what you've been up to since you filled out your mortgage application. Don't spoil all your hard work by giving the lender a reason to delay your closing or deny your loan altogether.
Verification During Mortgage Process
When you apply for a mortgage and begin underwriting several things happen. Over the next 45 to 60 days, the lender will make an inquiry into your credit history to determine your initial debt-to-income ratio -- the proportion of debts you carry to your gross income. For Fannie Mae, the debt-to-income ratio is 45 percent. The lender will also verify your current employment and assets, and will analyze your tax returns.
Why Lenders Make Last Minute Credit Checks
Once the lender is satisfied with your credit profile and confident in your ability to repay a mortgage, you'll be on your way to a closing, but a lot can happen between the time you apply for the loan and actually close. Fannie Mae and Freddie Mac require lenders to recheck your credit activity before closing for any changes since you applied for the loan. The lender will perform what's called a "soft credit pull" a few days before closing to verify certain credit activity is not present. The lender will look for undisclosed liabilities, a change in your debt-to-income ratio, or new debts that didn't appear on your previous credit report. The lender will also look for several hard credit inquiries made in short period of time, which indicate that you've been applying for or seeking additional credit.
Avoid These Things Before You Close
Loan originators recommend that you look at your credit during the underwriting process as a moment in time. Standing still and freezing everything will ensure that the lender doesn't get any red flags from the credit monitoring agencies. Avoid making any major purchases, seeking new credit, cosigning on a loan, making payments late, changing jobs, or incurring additional debt. Any of these events could trigger your application going back to underwriting to recalculate your debt-to-income ratio, and could impact your ability to afford the loan you previously qualified for.
Lenders expect that you'll shop around for the best rate on a mortgage. Inquiries within the same time frame are expected, but multiple mortgage closings in a short period of time are not expected. They could trigger a red flag, and even derail your closing or send it back to underwriting. If you're a real estate investor, this could pose an additional challenge if you have multiple deals on the table.
Lender Wants To Avoid Fraud
In addition to verifying your credit activity, the lender is also looking for signs of fraud. "Shotgunning" is an industry term given to a type of mortgage fraud where the borrower gets approved for several mortgages, closes on the loans, and then disappears with the cash. The lender, after closing, is left holding the bag for the mortgages when the scammer defaults on the loan.
- MSN Real Estate: 4 Problems That Could Ruin Your Mortgage
- New York Times: Pre-Closing Credit Checks
- New York Times: More Closing Jitters
- FastStart Real Estate Services LLC : Beware of the “Soft” Credit Check
- Mortgage News Daily: Ellie Mae Notes Looser Underwriting, Quicker Closes
- Equifax. "How Credit History Impacts Credit Scores." Accessed Feb. 4, 2020.
- Equifax. "Understanding Hard Inquiries on Your Credit Report." Accessed Feb. 4, 2020.
- FICO. "Amounts Owed." Accessed Feb. 4, 2020.
- Experian. "What Is Debt-to-Income Ratio and How Do I Calculate It?" Accessed Feb. 4, 2020.
Monica Dillon has more than 10 years experience in real estate sales, marketing, investing and appraising. She specializes in energy efficiency building practices and renewable energy. Dillon has been syndicated by the National Newspaper Publisher's Association. Her work has also appeared in the "Journal Of Progressive Human Services."