What Happens if Your Credit Score Drops Before Closing?

Your credit score plays a big role when purchasing a home. It also doesn’t stop mattering once you’re prequalified, as lenders will need to verify your credit leading up to closing.

A credit score drop before closing can happen more easily than many homebuyers expect. Even small changes may affect your loan terms or delay your closing timeline. The good news is that most of these situations are avoidable once you know how to protect your credit score from taking an unnecessary hit before closing.

Why Lenders Re-Check Credit Before Closing

Mortgage lenders typically check your credit again right before closing to confirm that your financial situation has not changed and that you still qualify for the home loan. This final review helps reduce risk for both you and the lender before funds are officially approved and released.

• Verify stability: Lenders want to see consistency. New debt, missed payments on your current debt, or higher debt balances since you applied for your mortgage could indicate a change that impacts your ability to repay your mortgage.
• Ensure accuracy: A final check gives lenders a chance to make sure all information on your credit report aligns with the financial information you provided with your application. If something unexpected shows up, it may be flagged for review.
• Review recent activity: Lenders may scan for new accounts, credit inquiries, or large purchases. Even small changes may require a closer look or updated documentation.
• Confirm loan eligibility: Your approval is based on specific credit criteria, including your credit score and debt-to-income (DTI) ratio. Lenders recheck to make sure you still meet those requirements.

During the prequalification process, many lenders (including Freedom Mortgage) perform a hard credit check to get a better understanding of your full credit history to determine your eligibility for the loan. As you get closer to closing, usually within one to three days of the closing date, the lender will perform a soft credit pull to confirm nothing has changed since your initial approval.

What Are the Risks of a Credit Drop Before Closing

Several things can happen if your credit score drops before closing.

Loan Denial

The lender could determine that you are no longer eligible for a mortgage. This can happen at any point during the home-buying process, even on the day of closing. Nothing is final until you sign your closing documents, so loan approval remains conditional until then. If you’re denied, you may be able to get your earnest money deposit back, but this depends on whether or not a financing contingency was included in the purchase agreement.

Loan Term Changes

You may not qualify for the same loan terms if your credit score drops. The lender may have to adjust your interest rate for you to meet loan qualifications, which can increase your monthly payment and the total cost of the loan over time. In some cases, you may need to bring more cash to close, or you may no longer qualify for certain loan programs. If it’s a significant credit change, then the lender might need to reevaluate or reapprove your loan before moving forward.

Underwriting Delays

Credit drops may cause a delay in underwriting, which means the lender needs more time to review or verify your information before giving final loan approval. This can push back the closing date and may require you to submit additional documents or explanations. Remember, during the mortgage underwriting process, even small changes, such as new credit activity, can slow things down.

What Could Hurt Your Credit Before Closing?

There are several common risks that can lead to a credit score drop before closing.

• New credit inquiries: Applying for new credit can trigger a hard credit inquiry, which can lower your credit score.
• Closing existing accounts: Closing a credit account, such as a credit card account, reduces your available credit and can shorten your credit history. This can increase your credit utilization (the percentage of your total revolving credit currently being used) and potentially lower your score.
• Taking on new debt: Taking on new debt or financing a big purchase, like a car, can increase your debt-to-income (DTI) ratio.
• Increasing credit card balances: Higher credit card balances can raise your credit utilization and lower your credit score.
• Missed or late payments: Payment history makes up the biggest share (35%) of your FICO credit score. Even one missed or late payment during loan approval can make an impact.
• Co-signing on a loan: Agreeing to co-sign on another loan adds new debt to your profile and can lower your score.

How Much of a Credit Score Drop Is Too Much?

A small change might not make much of a difference (especially with excellent credit); however, larger drops can raise some concerns for lenders. This is especially true if your credit score falls below the minimum credit score requirements for your loan program.

Mortgage approval is based on specific lending guidelines and thresholds of the loan type (such as conventional or VA loans). A decrease that moves you into a different credit tier could impact your interest rate or loan terms. Credit scores are generally grouped into ranges, such as excellent, good, fair, and poor, and crossing into the fair and poor tiers could force lenders to increase your rate to allow you to meet mortgage qualifying criteria.

What Is Considered a Large Purchase Before Closing?

A large purchase before closing is one that impacts your DTI ratio, credit score, or cash reserves. This could be a new car, furniture, or big appliances. Whether you finance a large purchase or pay cash, it affects your finances and could delay your closing or trigger a loan denial.

Here are some examples of purchases you should avoid before closing.

• Vehicles: Cars, trucks, boats, or recreational vehicles
• Furniture and appliances: New furniture or appliances for the new home
• Financed items: Any purchase financed through a new credit line
• Large cash expenditures: Using savings intended for closing costs or down payments
• Large investments: Moving funds into risky investments like stocks or crypto

How To Protect Your Credit Score Before Closing

Protecting your credit score before closing requires consistency with your financial habits to avoid any drastic changes. This means keeping your income stable and consistent, and avoiding new debt or large purchases. This is also a good time to keep an eye on your credit report to watch for any unexpected changes.

Take these steps if you see something that raises concerns.

1. Contact your loan officer as soon as possible
2. Check your credit report to find the cause
3. Don’t make any other big purchases
4. Dispute credit inaccuracies right away
5. Pay down debts as much as possible
6. Avoid opening new credit accounts or lines of credit
7. Continue making timely payments

Final Thoughts: Take Care of Your Credit Through Closing

Your credit score still carries weight after prequalification. Changes leading up to closing, such as new debt, higher balances, or missed payments, can affect your loan terms, delay your approval timeline, and, in some cases, rescind your mortgage approval. To avoid this, stay consistent with your finances, keep an eye on your credit report, and don’t make any major financial moves until your loan is finalized.

Ready to move forward with the home-buying process? Reach out to Freedom Mortgage today to get prequalified for a mortgage and take one step closer to becoming a homeowner.