You should seek mortgage pre-approval before you begin looking at houses, but getting preapproved doesn’t necessarily mean that you’ll be able to get a loan when you want to buy a house. A lender will check your credit report again shortly before closing. Changes in your credit usage, such as opening or closing a line of credit, could keep you from qualifying for a mortgage and getting a competitive interest rate.
Why a Lender Will Check Your Credit Again Before You Close
A lender will want to make sure that your financial status hasn’t changed significantly between the time when you got preapproved for a mortgage and the time when you want to go ahead with a home purchase. The company will likely pull your credit report again in the days prior to closing. A major change to your credit score, debt level or credit usage may cause the lender to raise your interest rate or deny your mortgage application, even if you were pre-approved.
How Opening or Closing a Line of Credit Could Hurt Your Chance of Buying a House
If you open a new credit card account or take out a new auto or personal loan, that can affect your credit in numerous ways. Before a company approves a credit application, it conducts a hard credit inquiry, which can immediately lower your score. It will rebound with time, but if there’s a hard inquiry right before you plan to close on a house, there may be enough time for your score to recover.
Mortgage lenders consider debt-to-income (DTI) ratio. If you take out a new loan, the monthly loan payments will increase your DTI ratio. That may put you above the lender’s guidelines and cause your mortgage application to be denied.
Closing a line of credit could also work against you. While it’s a good idea to pay off debt before you buy a house, you should keep credit card accounts open, even if you pay them off. A lender will look at your credit utilization ratio. That’s your total credit card debt divided by the sum of the credit limits on all your cards. If you close an account, its credit limit won’t be included when calculating your credit utilization ratio. That means the percentage will increase, even if your total amount of debt remains the same. An increase in your credit utilization ratio can lower your credit score, which may jeopardize your mortgage approval.
Credit bureaus also consider the length of your credit history when calculating your credit score. Closing an account will reduce the average age of your accounts, which can lower your score.
Keep Your Credit Stable
A mortgage lender will review your credit standing shortly before you close on a house. Opening or closing a line of credit may prompt the lender to raise your interest rate or refuse to give you a mortgage at all. Avoid any significant changes to your credit until after closing day.
