If you are applying for a home mortgage, you might already know that your credit score can be affected by the number of inquiries on your credit report. What you may not know is that even after you have been approved for your mortgage, your lender will likely pull an additional credit report just before you close in order to ensure your credit standing hasn’t changed. Unless you are careful, this second inquiry could just cost you your new home.
For years, the credit scoring systems utilized by the major credit reporting agencies used inquiries as a factor in computing your credit score. The number of inquiries on your report, the type of inquiry, creditor, and timing, are all variables in how much or how little your score is affected. In most cases, the impact on your score is minimal as creditors understand that borrowers are going to shop lenders for the best rate and term for their particular loan. There is, however, a new policy that some lenders have adopted in the last several months that involves inquiries but has nothing to do with your credit score.
Recently, some lenders have started requesting an updated copy of your credit report just before closing on the loan to insure that you haven’t taken on additional credit obligations or encountered any delinquencies since first applying for the mortgage loan. Beginning June 1st, these last-minute credit checks will become more common as government mortgage giant Fannie Mae institutes new requirements that also involve additional verification of new inquiries for credit, owner occupancy intentions, and borrower social security numbers. The additional requirements are designed to further discourage fraud and lapses in underwriting by originating lenders.
Under the new rules, if a borrower has had any “hard” inquiries, defined as a consumer-initiated credit request taking place between the initial mortgage application and closing, lenders are required to investigate the inquiry and determine if additional credit was granted that could add to the borrower’s debt burden. Lenders could subsequently reject the applicant based upon a debt ratio exceeding guidelines.
We all know that credit has tightened, both as a result of better fraud detection mechanisms and a difficult economy; this new policy is just another tool to achieve those goals. The bottom line is that borrowers, now more than ever, should resist the urge to shop for cars, furniture, and landscaping before they have signed on the dotted line.
