Buying a house can be both an exciting and simultaneously stressful experience. One reason the home buying process tends to be so stressful for many consumers — besides the fact that it’s probably the biggest purchase you’ll ever make — is the rigorous qualification process involved in getting approved for a mortgage.
If you’re preparing for a mortgage application, it is important to understand that qualifying for a home loan is a very different process than when you apply for most other types of credit accounts. Here are two important differences when it comes to qualifying for a mortgage versus other loans:
Difference #1: Lenders Look at All Three Credit Reports and Multiple Credit Scores
The biggest difference between applying for a mortgage and applying for just about any other type of financing is that, with a mortgage application, all three of your credit reports and three of your credit scores will be under the microscope.
When you apply for other types of financing (e.g., credit cards, auto loans, personal loans), the lender will typically only review one of your credit reports and one your scores.
Since three of your credit reports and scores are reviewed during a mortgage application, this means that a derogatory item, especially a public record or collection account with a large outstanding balance, could potentially put the brakes on your mortgage application — even if the offending item is only present on a single credit report.
If you were applying for an auto loan, you might still be able to get by and qualify for financing if you had an outstanding default that appeared on only one of your credit reports (one that wasn’t checked by the lender during your application). This isn’t the case when you apply for a mortgage loan. There are no secrets.
Difference #2: Just Because You’re Initially Approved Doesn’t Mean Your Credit Is Off the Hook
When you initially apply for your home loan, you may receive a “preapproval” letter from your lender if your credit and finances are up to par. Yet, contrary to popular opinion, a preapproval letter is not actually a guarantee of a loan.
Of course, it’s still wise to seek preapproval from a lender, because doing so will make realtors more willing to work with you and could make sellers more inclined to take your offer seriously. But you should remember that simply because you and your credit passed a lender’s initial test does not mean that the lender is 100% committed to giving you the home loan once you settle on a property.
Your lender will have checked your credit reports and scores prior to issuing your initial preapproval letter. However, even though your credit was checked at the beginning of the loan application process, that doesn’t mean your credit won’t be checked again later.
In fact, since the home loan closing process commonly takes 30, 60, or even 90 days, many lenders require a final credit check prior to closing to make sure your credit hasn’t undergone any changes in that time that would increase your level of risk.
Because your mortgage lender is likely to check your credit again prior to closing, it’s important to avoid making any mistakes that could impact your credit scores or increase your debt-to-income ratio (DTI).
This means that applying for new credit, opening new accounts, or running up a higher balance on any of your credit card accounts needs to be completely off limits until after closing.
You should avoid any of the aforementioned changes in your credit reports unless you want to risk the possibility of a lender delaying your loan closing, or even deciding to cancel the closing altogether.
The bottom line: Once you make your initial application for a mortgage, don’t do anything to your credit until you have the keys to the house in your hands.
John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. He has written four books on the topic and has been interviewed and quoted thousands of times over the past 10 years. With time spent at Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.