South Bend Home Loan

Wednesday, August 29, 2012

Beware the Soft Credit Check

Most home buyers know that a mortgage lender pulls there credit report at the beginning of the home buying process, but did you know that the mortgage lender pulls it again right before closing?  They do – it’s called a ‘soft credit check’ - and the results of it can cause you to lose your mortgage approval just days before buying your home.

The Soft Credit Check
A soft credit check is a credit pull that your mortgage lender will typically do in the last couple of days before the closing on your home purchase.  This type of credit pull does not impact your credit score, but it does show the mortgage lender if anything has changed on your credit report since you initially applied.

Mortgage lenders are looking for things that might make them change their mind about financing you.  These things could be items that make the credit score lower or items that make the debt higher.  Either situation could cause the mortgage to be declined at the very last minute, causing a great deal of stress and heartache for the home buyer, seller and Realtors.

Top Soft Credit Check Problems
So what kind of things could cause you to lose your mortgage approval at the last minute?  Here are the most common ones:

·       Higher monthly bills – some time people make multiple purchases around the time that they get their mortgage.  They buy new furniture, a new vehicle or some other financed item.  This could make your debt compared to income too high and you could become ineligible for the mortgage because of it.  Even co-signing for someone else’s loan during this period can cause you to be declined.

·       Higher credit card balances – Even if you don’t take out new debt during the mortgage process, racking up the balances on your existing credit cards can cause your credit score to drop to a point where you lose your mortgage approval.

·       Late payments – a lot is going on when buying a home and it’s easy to let something slip.  Even one small late payment can cause your score to drop significantly, though, causing your mortgage to be declined.  If you have loans on your credit report that are technically someone else’s but that you co-signed for, their late payment can have the same effect on your credit score.

·       Hard Inquiries – soft inquiries like this one done by your mortgage lender don’t impact your credit score but hard inquiries do.  Hard inquiries are credit pulls done by companies when you apply for new debt.  These inquiries indicate that you might be stretching yourself financially, and your credit score could drop because of this, causing your mortgage to be declined.

So what should you do to avoid losing your mortgage approval at the last minute?  The best course of action is to do NOTHING related to your credit during the mortgage approval process.  Don’t apply for any new debt.  Don’t increase the balances on your credit cards.  Don’t co-sign for anyone.  Don’t fall behind on any payments.  Basically, just keep your credit as it was when you applied for your mortgage originally.  Doing this will help you avoid the risk of losing your mortgage approval right before the closing on your new home.