When it comes to buying a home, there are many steps and processes involved. One of the most important aspects of the home buying process is securing a mortgage. And in order to do so, lenders will conduct a credit check to determine your creditworthiness. But when exactly do lenders check your credit and how many times do they do it before closing? In this article, we will explore the answers to these questions and provide tips on how to keep your mortgage on track.
First and foremost, it’s important to understand why lenders check your credit in the first place. Your credit score is a reflection of your credit history and it helps lenders determine the level of risk involved in lending you money. A higher credit score indicates that you are a responsible borrower and are more likely to make timely payments. On the other hand, a lower credit score may raise red flags for lenders and could result in a higher interest rate or even a loan denial.
So, when exactly do lenders check your credit before closing? The answer to this question can vary depending on the lender and the type of loan you are applying for. Generally, lenders will check your credit at three different points during the home buying process: pre-approval, pre-closing, and final closing.
The first credit check typically happens during the pre-approval stage. This is when you submit your initial mortgage application and the lender reviews your credit score, income, and other financial information to determine how much they are willing to lend you. This credit check is a soft inquiry, meaning it won’t affect your credit score. However, it’s important to note that pre-approval is not a guarantee of a loan. Your credit will be checked again later in the process.
The second credit check usually occurs during the pre-closing stage. This is when you have found a home and are in the process of finalizing the loan. The lender will conduct a hard inquiry, which can temporarily lower your credit score by a few points. This credit check is more thorough and may involve verifying your employment and income. It’s important to avoid making any major purchases or opening new lines of credit during this time, as it could affect your credit score and potentially jeopardize your loan approval.
The final credit check happens on the day of closing. This is when all the paperwork is signed and the loan is officially funded. The lender will conduct a final credit check to ensure that your financial situation has not changed since the pre-closing stage. If everything checks out, the loan will be finalized and you will officially become a homeowner.
Now that you know when lenders check your credit, it’s important to understand what they are looking for. Lenders will typically review your credit score, credit history, and debt-to-income ratio. They want to see a credit score of at least 620, a solid credit history with no major red flags, and a debt-to-income ratio of 43% or lower. It’s also important to have a stable employment history and a good track record of making timely payments on your debts.
So, how can you keep your mortgage on track and ensure a smooth closing process? The key is to maintain good financial habits and avoid any major changes to your credit or financial situation. Here are some tips to help you stay on track:
1. Pay your bills on time: This may seem like a no-brainer, but it’s crucial to make timely payments on all of your debts. Late payments can significantly lower your credit score and raise red flags for lenders.
2. Keep your credit card balances low: Lenders also look at your credit utilization ratio, which is the amount of credit you are using compared to your total credit limit. It’s best to keep this ratio below 30% to show that you are responsible with your credit.
3. Avoid opening new lines of credit: As mentioned earlier, opening new lines of credit during the home buying process can negatively impact your credit score. It’s best to hold off on any major purchases or new credit applications until after closing.
4. Don’t make any major financial changes: This includes changing jobs, buying a new car, or making large purchases. These changes can affect your debt-to-income ratio and raise concerns for lenders.
In conclusion, lenders will check your credit at least three times during the home buying process: pre-approval, pre-closing, and final closing. It’s important to maintain good financial habits and avoid any major changes to your credit or financial situation in