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Why Mortgage Lenders Pull Your Credit History Twice

Written by Ilyce Glink on August 27, 2010 in Real Estate  |   6 comments

Last year, I found myself shopping at a major retailer. The store was having a great sale, and I found a fair number of clothes that fit me, all at an excellent price. When I was checking out, the cashier offered me a big discount…

Credit requirements cause mortgage lenders to pull credit history twiceLast year, I found myself shopping at a major retailer. The store was having a great sale, and I found a fair number of clothes that fit me, all at an excellent price.

When I was checking out, the cashier offered me a big discount if I opened up a major credit card co-branded with the retailer. I had wanted to see what would happen to my credit history if I opened up a new line of credit. This seemed like a good opportunity.

Sure enough, even though I’ve had my other major credit cards for more than twenty years, just opening up this one new account directly affected my credit history and dropped my credit score by about thirty points.

If you were to open up a new credit account, it would have a different effect on your credit history and credit score than my new account did on mine. That’s because we all have different types of information on our credit history.

But this experience also explains why mortgage lenders will pull your credit history at least twice between the time you apply for and close on your loan.

In today’s new world of mortgage finance, lenders are tightening credit requirements. It’s far more difficult to get a mortgage today than it was five years ago. Even borrowers who have near-perfect credit histories with credit scores in the 800 range are being rejected for reasons that seemingly make no sense-like a small investment loss taken on a tax return, or an extra $500 deposited into a savings account that couldn’t be adequately explained.

Lenders are looking for risk-free borrowers-or as near to that as they can get. Your credit history is a snapshot of your financial life. By pulling a copy of your credit history as you apply for a home loan, the lender is determining whether your risk profile is acceptable. By pulling a second copy of your credit history just before you close, the lender is making sure nothing much has changed since the loan was initially approved.

(Remember that when you apply for a mortgage, the lender will pull a credit history for each person signing the loan, whether it is your spouse, partner, relative, or friend.)

What doesn’t the mortgage lender want to see on that second pull? New credit cards, new lines of credit, late payments, judgments, or any other negative information.

If you want to ensure that your home loan closes on time, get all of your bills paid on time and in full, don’t rack up any extra debt, don’t make any major purchases that you can’t pay off at the end of the month, and don’t open up any new lines of credit-even a small one.

The credit card I opened had only a $2,000 line of credit. I charged several hundred dollars worth of clothes and paid it off before the end of the month.

I saved 20 percent on the clothes. I cost myself thirty points in my credit score.

The good news is that six months later, with continued on-time payments, my credit score rebounded to just about where it was before I opened up that credit card.

How has your credit score been affected by new lines of credit you’ve opened?

Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and at the Home Equity blog for CBS MoneyWatch.

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6 comments

  1. Jerry says:

    I disputed some things on my Equifax report and they were removed. However, my score dropped nearly 50 points even though the negative items were removed.

  2. Doug Francis says:

    Home buyers should understand that their mortgage lender has put an "alert" on their credit file to notify the lender of any new lines of credit prior to closing. Yup, just like Equifax notifies me when a balance increases or an account changes… their mortgage guy gets an e-mail alert!

  3. Ilyce Glink says:

    Doug:

    Thanks for your comment. It's true that mortgage lenders can find out almost instantly when one of their borrowers (or, in the case of mortgage applicants, borrowers-to-be) does something that impacts credit. But HUD claims to be laying off on the rule that requires a second credit history/score be pulled – in fact, they claim they never intended for lenders to do that, it's just that the lenders (I think) have swung from being carefree about lending to being beyond-cautious. We'll have to see how this plays out over time.

    Thanks for your comment.

  4. Ilyce Glink says:

    Jerry – not sure why your credit score dropped when items were removed from your credit history. But there could be other things bringing you down. Give it another 30 days, and if your credit score hasn't "recovered" to where it was previously and if there are no other negatives that might be pulling down your credit score, you should do a deeper investigation and write to the credit reporting bureaus.

    Thanks for your comment. We're talking about doing a live interactive comment time on the blog with our Equifax Credit experts. This would give you face-to-face real-time access to people with the best credit information.

    Would you be interested in that?

  5. John L. says:

    A live, interactive blog is a fine idea. Many consumers need live assistance.

    My question: How do lenders treat discharged mortgages which are unreported to the Credit reporting companies (Equifax, Transunion, Experian, et. al.) ?

    I paid off (2004) & discharged (2010) a mortgage on my principal residence, I have clear title. The last holder was not member of Eqiufax, Transunion, et.al.

    Will lenders enter this discharged mortgage into the application/ calculation in granting a loan in the future ?

  6. Anonymous says:

    When a lender pulls your credit it lowers your credit score each time. This shouldn’t lower your scores. How many times can a lender pull your credit scores in a 2 week period?


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