Do Banks Run A Second Credit Check Before Closing?
Applying for a home loan can be a very time consuming and stressful process. In today's real estate mortgage landscape, lenders are cautious to whom they loan money and the new normal of a healthy down payment is a strong indicator of how serious banks are about protecting their interests.
The national economic downturn, which began in earnest in mid-to-late 2008, might have officially come to a close in June of 2009; however, the lasting effects remain lingering for the financial industry. At the onset of the Great Recession, banks were at the forefront of the fallout, and still are trying to recover from hundreds of millions of dollars in defaulted home equity loans, student loans, small business loans, commercial real estate loans, home mortgages, and other debt instruments.
Because of this, financial institutions would be happy to start lending at an increased pace; however, a slew of new banking regulations put a real barrier between lenders and borrowers. Along with said regulations is a dichotomy of some congressional members, consumer rights groups, and other interests pressuring banks to make more home loans. Striking a balance is precarious at best, and that's why some lenders do run a second credit check or what's called a "soft credit check".
The Mortgage Approval Process
Traditionally, the home loan approval process consists of running an application and the property through a series of checks. It's no secret that when potential borrowers submit mortgage applications, their credit file is reviewed for its contents and for lenders to learn their scores. That information is then turned over to underwriters, who give their approval, and then the property is appraised by a professional to ensure the loan amount is commensurate with the true market value of the home.
Banks want four things in a perfect mortgage borrower: 1) Stable income; 2) Attractive credit history; 3) Low debt-to-income ratio; 4) Big down-payment. If a customer is lacking in any one (or more) of these, said customer will have a difficult time getting a loan. --Bills.com
Once all that is done, the loan is approved and it goes to settlement or to what most people know as "closing". That's the traditional route, but things have changed, and some lenders now employ extra measures to ensure that borrowers are able to repay their loans. These include using in-house or third-party identity theft monitoring and a second or soft credit check. Basically, these extra precautions are to give banks a bit more peace of mind about their loans, but, these can also be one or more reasons the loan will be pulled from the borrower. Lenders will back out of the transaction should there be transactions which directly or indirectly impact the ability of a borrower to repay.
Beware the Second or Soft Credit Check
The promise of buying a home means a lot; and, because there's a lot of emotion involved, as well as pride and a sense of accomplishment, along with a healthy dose of an optimistic future, some borrowers try to have it all. Giving into this temptation is easy to rationalize, but it can be a very costly mistake. Here are some things you really want to avoid doing because they will put your mortgage approval at high risk:
- Do not take out any other loans. Banks approve loans based not only on credit, but the borrower's DTI or debt-to-income ratio. That's the difference between a borrower's monthly gross income and monthly obligations. Any loans can throw the original ratio off, and a change in numbers means too much risk for the bank to go through with the loan.
- Do not empty your savings and/or checking account. Lenders also check your cash reserves because they are quite interested to know if you'll have the money for the closing costs, and, for an emergency repair once you're in the home. If you pull out cash, that might cause problems or the loan might not go to closing at all.
- Do not change jobs. This is something that really unnerves lenders because it's a large part of the reason the loan was initially approved. Such a move signals that you're not committed and that you are probably an unwarranted risk to give hundreds of thousands of dollars.
- Do not purchase big ticket items. The new car can wait and so can the new furniture. Just because you have a good credit score and a steady income, it doesn't mean these won't impact your debt-to-income ratio and lenders do not go through with loans to borrowers who are stretched too financially thin.
- Do not open new lines of credit. You might be tempted to take advantage of that 10 percent discount for opening a new store credit card so that big screen TV won't hit your wallet so hard. Any new lines of credit are bad, even if you don't purchase anything, because that's considered to be potential debt.