Will Your Mortgage Lender Pull Your Credit a Second Time Before Closing?

It's no secret that your credit plays a big role in whether or not you'll get a mortgage loan approved. What many buyers don't realize, however, is that just because your initial credit check goes well that doesn't mean you're out of the woods credit-wise. Although all mortgage lenders' policies differ, its very likely that your lender will conduct a second credit check before closing.

Why Mortgage Lenders Pull Your Credit a Second Time

Your mortgage lender pulls your credit a second time for the same reason it conducted the original credit check--to ensure that you've A.) remained financially stable and reliable and B.) Not incurred any new debt that would encroach upon your ability to keep up with your new mortgage payments.

I know what you're thinking, "Isn't one credit check enough?" and the answer to that is a resounding NO. People spend long periods of time preparing their credit for that one credit check. They'll tuck away their old bad habits and work tirelessly clearing away credit blemishes in an effort to ensure high scores during the mortgage credit check. For these folks, its a bit like a bride-to-be dieting herself to insanity before her wedding. After the wedding, the pressure is off and her predilection for twinkies and fried chicken comes back with a vengeance. The same is true when it comes to credit. Once that mortgage credit check is out of the way, the pressure to perform is gone and irresponsible people often run right back to their old lets-have-fun-maxing-out-the-credit-card ways.

What Happens If You Take on New Debt Before Closing?

It isn't only irresponsible people who make mistakes between the first credit check for a mortgage and the credit inquiry the lender conducts before closing. Here's a very common scenario:

Joe paid off his wife's car years ago, but the car is starting to have problems that require expensive repairs. Joe wants to buy his wife a new car, but the couple is getting ready to apply for a mortgage loan. Joe knows that the added debt he would take on by purchasing a car would decrease his debt-to-income ratio which would affect his mortgage approval. The new car will have to wait.

Joe and his wife are approved for a $200,000 mortgage. They've chosen at house that costs $195,000. Now that the mortgage credit check is out of the way, Joe buys his wife a new car. The payments are $500 a month. Joe doesn't realize that the mortgage lender will pull his credit a second time before closing. The second credit check reveals Joe's new debt which decreases the amount he's approved for. Joe and his wife have to drop the contract on the $195,000 house they would have had no trouble buying if Joe had simply waited to buy the car.

For most people, the period of time from accepted offer to closing only lasts 30-60 days, so the danger of having credit changes significant enough to derail your mortgage approval is low. If the mortgage process is more complex, such as when you're buying a short sale, the length of time from application to closing can be much longer--making it more likely that recent financial changes will show up on your credit report and affect your pending mortgage loan.

I think its important to note here that, although last-minute credit checks before closing are still common, not every lender uses them. Loans guaranteed through Fannie Mae, for example, haven't required a second credit check for years now. Keep in mind, however, that ultimately the decision on whether to pull your credit again before closing lies with the lender. It's always wiser to behave like that second credit check is coming....just in case.

The moral of the story? Wait until you sign the closing papers and the keys are in your hand before you take on any new debt. Yes, we live in a world of instant gratification, but tread with caution. In these post-recession days, banks are still hesitant to loan money and the last thing you want to do is cheat yourself out of that mortgage you so desperately want by flunking the second credit check.

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