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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Signs That a Collection Agency is About to Sue You

When dealing with collection agencies, nothing is scarier than the prospect of a lawsuit. Unfortunately, debt collectors aren't known for their ethics and will often say whatever they need to say to coerce you to make payments--including threatening to sue you. So how do you know if a collection agency actually plans to sue you or not? There is no surefire way to tell, but there are certain signs to look for that can tip you off to an impending lawsuit.

1. The Statute of Limitations is Approaching

After the statute of limitations or "SOL" passes, it technically isn't legal for a collection agency to sue you. Because lawsuits are a last resort, debt collectors will do everything in their power to ensure that you pay up before the SOL arrives and the debt is no longer enforceable. If it becomes clear that isn't going to happen, a smart collector will file a lawsuit against you before the SOL arrives. Keep track of the SOL on your debt and if you suddenly start receiving lawsuit threats around that time, take them seriously.

2. You Got a New Job and You're Paying off Debt

Think your employment record is private? Think again. New jobs often appear on your credit report and, if you owe money to a collection agency, you can rest assured that debt collectors are monitoring your credit report religiously. If your credit report shows that you have a new job and/or are paying off other creditors, the collection agency will go to great lengths to get a piece of the action--and that may just include a lawsuit.

3. You Have a Large Amount of Unpaid Debt

Suing debtors costs money. Although collection agencies can include attorney fees in the lawsuit, they may or may not be able to collect on that debt. Because the collection agency has to pay its attorney up front, it generally isn't worth the collection agency's time to sue you over a paltry amount. Just to clarify, a debt of $5000 is a lot more likely to land you in a courtroom than a debt of $200.

4. The SOL Hasn't Expired and You Blocked the Collection Agency From Contacting You

When used correctly, a cease and desist letter can be an invaluable tool to protect yourself from debt collector harassment. When used incorrectly, however, it can put you in a dangerous position. Just to clarify, a cease and desist letter informs the collection agency that it can no longer contact you. Federal law requires collectors to honor cease and desist letters from debtors. The problem arises when the collection agency can no longer contact you. If it cannot contact you, its only option to collect the debt is to file a lawsuit. This is only true, of course, if the statute of limitations has not expired. Once the SOL expires, the collection agency isn't supposed to sue you anyway--regardless of whether you ban it from contacting you or not.

5. Your Account Has Been Referred to a Real Attorney

Collection agencies are infamous for having in-house lawyers that write letters as empty as they are threatening. If you receive notification that the collector has sent your account to an outside attorney, take note. Googling the attorney should give you a good idea of what he/she does. Forums are also invaluable when it comes to getting information about whether the attorney follows through with his/her threats. Once your account is referred to a real attorney, tread carefully.

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Credit Checks: Do Collection Agencies Conduct a Hard Pull or Soft Pull of Your Credit Report?

If you owe debt to a collection agency, expect that agency to pull your credit report. Not only does the information on your credit report help debt collectors track you down, it also gives the company information about whether you are likely to pay or not. But beware – a collection agency can do more to hurt your credit  score than merely adding its negative tradeline to your credit report. Why? Because collection agencies conduct hard pulls.

Credit Checks: Hard Pull vs. Soft Pull 

Whenever a business pulls your credit report, it conducts either a hard pull or a soft pull. A hard pull dings your credit score (generally no more than 10 points, if that) while a soft pull has no impact on your credit scores at all. Hard pulls are associated with financial transactions in which there is a measure of risk, whereas soft pulls are not. For example, if you apply for a loan or credit card, your lender will conduct a hard pull because the inquiry is related to a financial transaction. When an employer pulls your credit or you pull and review your own credit report, the inquiry falls into the "soft pull" category because is not connected to a financial transaction.

Pull your own credit online at AnnualCreditReport.com

Regardless of whether you have any intention whatsoever of paying your delinquent debt, the collection agency's credit check is connected to a financial transaction. They want to see your financial history to determine the best way to get you to pay up.

Collection Agency Made Numerous Hard Pulls 

The Fair Credit Reporting Act allows your current creditors to pull your credit reports whenever they wish. This includes debt collectors. Any rational person would expect a collector to pull their credit report intially, but some collection agencies make multiple hard pulls. If the collection agency's trade line on your credit report weren't bad enough, multiple hard inquiries within a short time frame can literally kill your credit scores. Some collection agencies go so far as to pull your credit report every month.

Why do they do this? Most will claim they do so to keep an eye on your assets and see if anything in your financial life has changed – rendering you able to pay off your debt. But collection agencies are capable of conducting soft pulls to meet this goal. If a debt collector is conducting a hard inquiry every month, the company is likely intentionally damaging your credit score as much as possible. This is especially true if you still have a decent credit rating after the collection trade line appears on your report.

Also, negative information hurts your credit scores less as time goes by. By making numerous hard credit inquiries, debt collectors make your life that much more difficult. The rationale behind this (imho) is, "If we harass these debtors for long enough, they'll eventually pay us simply to get us off their backs." Even worse, your current and future creditors can see which companies have conducted hard pulls in the recent past. A slew of hard inquiries from a debt collector can indicate you're in financial trouble – leaving future lenders to think twice before doing business with you. This serves two purposes: it makes you more likely to pay off the debt to stop the harassment and it also reduces your chances of acquiring new debt – leaving you extra income that you can now apply to your collection debt.

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