How Many Credit Checks Before Closing on a Home?

By DaShunda Morris

Buying a home is a significant financial milestone for many individuals and families. From finding the perfect property to securing a mortgage, the process can be both exciting and daunting. One essential aspect of the home buying journey is understanding the role credit checks play in the process. Let’s explore how credit checks impact the home buying process and how many credit checks typically occur before closing on a home.

Understanding Credit Checks

Before we delve into the number of credit checks involved, let’s briefly understand what a credit check entails. A credit check is a routine evaluation of a person’s credit history, which includes information about their credit accounts, payment history, outstanding debts, and other financial details. It provides lenders with valuable insights into an individual’s creditworthiness and helps them assess the risk associated with granting a loan.

Credit Checks During The Mortgage Application Process

When applying for a mortgage, lenders need to determine whether a borrower is eligible for a loan and at what interest rate. Consequently, several credit checks may be conducted at different stages of the mortgage application process.

1.PRE-QUALIFICATION:

During the initial stage of the home buying process, prospective buyers typically seek pre-qualification from lenders. Prequalification is a preliminary assessment of a borrower’s financial situation based on self-reported information. At this stage, lenders may perform a soft credit check that doesn’t impact the borrower’s credit score. Soft inquiries provide a general idea of the borrower’s creditworthiness and help lenders suggest suitable loan options.

2.PRE-APPROVAL:

After pre-qualification, serious homebuyers often seek pre-approval. Unlike prequalification, pre-approval requires a more comprehensive credit evaluation. Lenders perform a hard credit check, which may cause a slight temporary dip in the credit score. However, this hard inquiry allows lenders to make a more accurate assessment of the borrower’s creditworthiness and offer a more reliable loan estimate.

3.UNDERWRITING PROCESS:

Once a borrower has made an offer on a home and it has been accepted, the lender will proceed with the underwriting process. This involves a thorough examination of the borrower’s financial information, including credit history, income, and debt-to-income ratio. Another hard credit check is typically conducted at this stage to ensure the borrower’s credit situation hasn’t significantly changed since the pre-approval.

4.CLOSING:

Shortly before closing on the home, lenders may conduct a final credit check. This is a precautionary measure to ensure the borrower’s credit has remained stable and that no new debts or loans have been acquired since the initial pre-approval.

Impact On Credit Score

The impact of credit checks on a borrower’s credit score depends on the type and frequency of the checks. As mentioned earlier, soft credit checks have no effect on credit scores. On the other hand, hard inquiries may cause a temporary dip in the credit score, usually around 5 to 10 points. However, multiple hard inquiries within a short period, such as those made when shopping for mortgage rates, are usually treated as a single inquiry to minimize the impact on the borrower’s credit score.

Conclusion

In conclusion, several credit checks may occur before closing on a home during the mortgage application process. Prequalification, pre-approval, underwriting, and final credit checks are standard steps to ensure lenders can accurately assess a borrower’s creditworthiness and determine appropriate loan terms. While hard credit inquiries may cause a minor, temporary dip in credit scores, they are essential for securing a mortgage with favorable terms. Prospective homebuyers should be proactive in managing their credit, avoid taking on new debts during the application process, and work with reputable lenders to navigate this crucial aspect of the home buying journey successfully.