Buyers: Between Your Initial Offer and Closing, Maintain Your Credit

One of the most common questions I encounter, especially with first-time buyers, is if lenders are going to pull that buyer’s credit more than once during the purchase process.


The short answer is yes, and they’re going to pull it at least twice. It’s pretty much the standard for lenders to pull borrowers’ credit in the beginning of the approval process, and then again just prior to closing. This is why as agents, we always emphasize that our clients shouldn’t get a new car or open a Kohl’s credit card during the purchase process.


It sounds like conventional wisdom, but you’d be surprised by how many buyers don’t understand this. Let’s say you have outstanding credit and you passed the initial check for preapproval with flying colors and netted yourself a good interest rate. Be proud about that, because you worked hard for it. It doesn’t mean you’re done with credit checks, though.


Make no mistake, I get it: navigating the purchase of a home is overwhelming if you’ve never done it before (and a lot of my job is guiding buyers through the process). There’s a lot to keep track of and lenders basically put you under a microscope at the same time, requiring documentation of seemingly every detail of your life. So let’s walk through what happens and why it’s important to maintain your credit in that window between preapproval and closing.


The initial phase of acquiring a loan is pre-qualification, where you’ll self-report financial information. Lenders are going to want to know details, and they’re going to scrape down to bare metal while doing it. They want to know your credit score, social security number, marital status, history of your residence, employment and income, account balances, debt payments and balances, confirmation of any foreclosures or bankruptcies in the last seven years, and even the sourcing of a down payment. That’s not even all of it, either!


The next step is preapproval, and it’s here that lenders will actually verify your financial information. To do this, they need documentation to confirm the information you submitted in your application. At this point, they’re pulling your credit history for the first time. This is the first credit check, and you may be required to submit a letter of explanation for each credit inquiry in recent years, such as opening a new credit card, and for any derogatory information in your history, like a missed payment. Yes, a late utility bill payment is probably going to come up.


I’m going to pause for a minute here and draw a distinction between pre-qualification and preapproval because they’re very different things. Pre-qualified means that a lender is reasonably receptive to the idea of taking you on as a borrower based on information you’ve volunteered. Nothing has been verified, though, so actual approval is contingent on that information being accurate. Preapproval, as we just saw, is when the lender has seen documentation and approved you for a loan for a given amount at a given interest rate.


In most markets in the United States, there are fewer homes for sale than there are buyers. This means you’ve got a lot of competition as a buyer. A buyer who’s only pre-qualified is going to have a weaker negotiating position than one who’s preapproved, because with the latter a seller has more confidence that the buyer can follow through. In other words, if you’re serious about buying a home, you need to go through the preapproval process before even looking at homes.


So, once you find a home within budget and make an offer, be prepared to submit additional or updated documentation. Underwriters then analyze the risk of offering you a loan based on the information in your application, credit history, and the property’s value.


It can take time for your offer to be accepted, and for your loan to pass underwriting. Many lenders pull borrowers’ credit a second time just prior to closing to verify your credit score remains the same, and therefore the risk to the lender hasn’t changed. During this window between preapproval and closing, you want to avoid any new incidents on your credit report. For example, if you were late on a payment and were sent to collections, it will affect your loan. If you acquired any new loans or lines of credit and used those credit lines, your debt-to-income ratio would change, which can also affect your loan eligibility.


If the second credit check results match the first, closing should occur on schedule. However, if the new report is lower or concerning to the lender in any way, you could lose the loan. The alternative is that the lender may send your application back through underwriting for a second review, which lengthens the timeline on closing and may reduce what you can actually afford due to changes in loan terms like interest rates.


Here’s the kicker, though: even hard inquiries will show up on your credit report and can affect your loan. This is because loans are complicated instruments and they require a lot of actuarial calculations on the lender’s end. With all of those moving parts, it’s kind of like the engine on your car: if one component goes out, the entire car may not be drivable. Loans work the same way. It’s a balancing act, so do what you can to not upset it. Don’t open that Macy’s card just to get 10% off your next purchase.


– Matt Guarro is a Realtor in the Central Florida – New Smyrna Beach area