As you probably guessed, FHA lenders pull your credit in order to process your application. If you don’t have a high enough score, there’s no reason for the lender to move forward with the process. However, once you approved, does the lender check your score again?
The answer is that it depends. Generally, yes, lenders check your score one more time right before closing. It’s not an FHA requirement, though, so may find lenders that don’t check it again.
Why Do Lenders Pull Credit Again?
You might wonder why it is even necessary to pull credit again. If a lender pulled it at the start of the process, why do they need it again before closing?
The answer is simple. There is a lot that can happen in a month or two, which is how long it takes to close an FHA loan. If your score drops enough, it could be a red flag for the lender that something changed. They will need to know if you took out a new loan, had new inquiries, or stopped making certain payments. Each of these situations would affect your approval.
What If you Took Out a New Loan?
If after pulling your credit, the lender determines that you opened a new loan, they have to go back to the drawing board. A new loan means a new monthly payment. This means a higher debt ratio. It doesn’t mean you automatically won’t qualify for the loan, but it can create an issue, at least one the lender must address.
What Other Red Flags Occur?
Even if you didn’t take out a new loan, there are other things you can do that may show up on your credit report, causing alarm for the lender.
- Multiple inquiries – If you have inquiries on your report, it means you authorized another company to pull your credit. Unless it’s another mortgage company because you were shopping around, the lender is going to get suspicious. They will likely need proof that you didn’t open any other accounts since you started your loan application.
- Dropped score – If your score dropped, a lender will look into why that happened. Maybe you have a new collection reporting on your credit report that wasn’t there before. This is a red flag to lenders. It shows that you are experiencing financial difficulty. It could make them second-guess their decision to lend to you.
These are the most common things underwriters see. They are not a guaranteed denial. If anything, they are a reason for the lender to look at the file one more time before closing. While it might seem ridiculous to you, it could save you from financial ruin in the future if you really cannot afford the loan.
Qualifying for the FHA Loan
Luckily, the FHA loan is rather flexible. You don’t need great credit or a really low debt ratio. You can qualify with a score as low as 580 and a debt ratio as high as 41%. That’s nowhere near what the conventional loans require.
However, if your situation changes during the time you apply for the loan and the closing date, it’s cause for concern. Your best move is to keep everything just as it is when you applied for the loan. In other words, don’t apply for new credit or even try to consolidate your current debt. Also, make sure you continue to make all of your payments on time.
One small change in your score could be a reason for the lender to start poking around to see what else changed. If you keep everything static, you’ll have a better chance of closing your loan without a second glance at your file once again.
The FHA loan is as lenient as they come. With the government guarantee, lenders can give loans to borrowers that are somewhat risky. Without the guarantee, lenders probably would not lend to these borrowers. But with the guarantee, the lender is covered and the borrower gets to purchase the home he wants.
Do your best to keep your credit score as stable as possible until you close on your loan. Don’t make the mistake of thinking your score is high enough and you can afford to make a few small changes. A few months is all you have to wait to make changes. It’s in your best interest to wait it out!