What If My Credit Score Goes Up Before Closing? A Deep Dive

If your credit score takes a positive leap before your mortgage closing, congratulations! This can often lead to more favorable loan terms. Specifically, a higher credit score could unlock a lower interest rate, reduced fees, or even access to a better loan program. While it’s generally a good thing, it’s crucial to understand the nuances and potential actions you might take to leverage this improved financial standing.

Understanding the Impact of a Higher Credit Score

A higher credit score signifies lower risk to lenders. It demonstrates a greater likelihood you’ll repay your debt responsibly. Lenders use a tiered pricing system; the better your credit score, the better the terms you qualify for. This is especially true when securing a mortgage, one of the largest debts most people will undertake.

Interest Rate Implications

The most immediate benefit of an improved credit score is the potential for a lower interest rate. Even a small reduction in the interest rate can translate into significant savings over the life of the loan, potentially thousands of dollars. For example, moving from a credit score in the mid-600s to the low 700s could shave off a quarter to a half percentage point (or even more) from your interest rate.

Impact on Loan Programs and Fees

Beyond the interest rate, a higher credit score might qualify you for different loan programs. Some programs, like those offered by the Federal Housing Administration (FHA), have minimum credit score requirements. Improving your score could open doors to more options. Additionally, certain fees, like private mortgage insurance (PMI) on conventional loans, can be influenced by your credit score. A higher score could mean lower PMI costs or even the ability to avoid it altogether.

What Actions Should You Take?

Once you realize your credit score has improved, the first step is to inform your loan officer immediately. They can guide you on the next steps.

Notifying Your Lender

Your loan officer will need to verify your improved credit score. They will likely order a new credit report or credit refresh. This is essential to officially document the change and make it usable for your loan application. Be aware that pulling a new credit report can slightly lower your credit score, but this is usually a negligible amount and shouldn’t negate the overall improvement.

Re-Evaluating Loan Options

Once the updated credit report is in hand, your loan officer can re-evaluate your loan options. They can check if you qualify for a lower interest rate or different loan program. Don’t hesitate to ask them to run the numbers to show you the potential savings. Compare the old and new loan estimates carefully, paying close attention to the interest rate, monthly payment, and total cost of the loan.

Potential for Delay

Keep in mind that re-evaluating your loan application with the updated credit score may cause a slight delay in the closing process. New underwriting and approvals might be needed. Discuss this with your loan officer to weigh the benefits of a lower interest rate against the potential for a delayed closing. If you are on a tight schedule due to lease expiration or other factors, this is a crucial consideration.

Frequently Asked Questions (FAQs)

1. How is my credit score checked during the mortgage process?

Lenders typically pull a tri-merge credit report from all three major credit bureaus (Equifax, Experian, and TransUnion). They then use the middle score to determine your creditworthiness. If there are two borrowers, the lender usually uses the lower of the two middle scores. The score used must be current, within a certain timeframe (often 30-45 days) of the closing.

2. Can I shop around for a better interest rate after my credit score improves?

Yes, you can and should shop around. However, time is of the essence. You’ll need to move quickly to compare rates from different lenders and decide before your closing date. Provide the updated credit report to each lender you consult with. Remember that each lender will pull their own credit report, which might slightly impact your score temporarily.

3. What if my credit score only improves by a few points? Will it make a difference?

Even a small increase in your credit score can make a difference, especially if it pushes you into a higher credit score tier. Lenders often have cut-off points, and crossing one can unlock better rates and terms. Ask your loan officer to explore the potential impact, even if the improvement seems minor.

4. What if my credit score improves, but my debt-to-income ratio is too high?

While a higher credit score is beneficial, lenders also consider your debt-to-income (DTI) ratio. If your DTI is too high, it could offset the benefits of the improved credit score. Consider ways to lower your DTI, such as paying down other debts, before closing.

5. What if my credit score improves, but I recently opened a new credit account?

Opening a new credit account shortly before applying for a mortgage can sometimes be viewed negatively, even if your overall credit score improves. Lenders might see it as an increased risk. Discuss this with your loan officer to understand their perspective.

6. Can I lock in a lower interest rate if my credit score improves after I’ve already locked in my rate?

This depends on your lender’s policy. Some lenders may allow you to “float down” your interest rate if your credit score improves, for a fee. Ask your loan officer about this possibility and weigh the cost against the potential savings. Not all lenders offer this option.

7. How can I quickly check my credit score before closing?

You can use free credit monitoring services like Credit Karma, Credit Sesame, or AnnualCreditReport.com to get an estimate of your credit score. However, remember that these are often VantageScores, which may differ slightly from the FICO score used by mortgage lenders. Your loan officer will pull an official credit report for verification.

8. What if my credit score goes down instead of up?

If your credit score decreases before closing, it could negatively impact your loan terms. Your interest rate could increase, you might have to pay higher fees, or you could even be denied the loan altogether. Avoid taking any actions that could harm your credit score, such as opening new accounts, maxing out credit cards, or missing payments.

9. How long does it take for a credit score improvement to reflect on my credit report?

It typically takes 30-60 days for changes to your credit report to be fully reflected. However, some updates might be visible sooner. The timing depends on when the creditor reports the information to the credit bureaus.

10. Can I dispute errors on my credit report right before closing?

Disputing errors on your credit report right before closing can be risky. While it’s important to correct inaccuracies, the dispute process can take time, and it might delay your closing. Discuss this with your loan officer to determine the best course of action. Sometimes, waiting until after closing to resolve the dispute is the wiser choice.

11. What if my co-borrower’s credit score improves?

If your co-borrower’s credit score improves, it could still benefit the loan. Lenders typically use the lower of the two middle scores, but if your co-borrower’s improved score is now higher than yours, it could result in better terms.

12. Is there anything else I should avoid doing before closing to maintain my credit score?

Absolutely. Avoid applying for any new credit, closing existing accounts, making large purchases on credit, and missing any payments. Keep your credit utilization low (ideally below 30% of your credit limit). Essentially, maintain the status quo with your credit profile until after you’ve successfully closed on your mortgage. Any significant changes can raise red flags with the lender and potentially jeopardize your loan.