Did you know your mortgage lender is likely to make at least two credit checks prior to your closing on a home purchase? Everyone knows about the first, which happens when you make your application: It plays a large part in determining whether you get an offer at all and what rate you're going to pay. But it's common practise for a second check to be made immediately prior to closing, just to make sure nothing material has changed since the first, and too few people know about that one.
Being Careless Over Your Credit Costs
As a result, a surprising number of borrowers find their mortgage offers being withdrawn immediately before they close, or, more commonly, a higher mortgage rate being demanded in a take-it-or-leave-it ultimatum. So just a small dip in your credit score between applying and closing can cost you dear.
How small and how dear? FICO, the company whose technologies drive the nation's most popular (well, most widely used) scoring systems has a handy calculator on its website that lets you see how much impact your score can have on your mortgage borrowing costs. Using nationwide averages on July 11 2016, and assuming a loan of $150,000, it reckons someone with a credit score of 761 might expect monthly payments of $654, while someone with a 759 score could pay $636. Over the lifetime of a 30-year mortgage, that would see the person with that two-point lower score pay $6,535 in extra interest. It's even worse for those with poor credit: Someone with a 639 score could for that same loan pay $17,371 more in interest than someone with a 640 score.
To be fair, those aren't typical examples. FICO uses ranges of scores to define borrowers' creditworthiness, and if you're near the top of one range your score could dip 10, 20 or even more points without your slipping into the lower range, so the cost of your borrowing might not change at all. But lenders often use ranges (not necessarily the same ones FICO does) in a similar way, which means that if you're near the bottom of a range, you could take a serious hit if your score dips by just a point or two.
Play Possum Prior to Closing
Luckily, you normally have almost complete control over what happens to your credit score between receiving your mortgage offer and closing. Of course, you absolutely must make sure every single bill is paid on time, and, if you can, it would be good to reduce any credit card balances you have. Who knows? Maybe lower debt on your plastic might move you into a more creditworthy score range, and you might be offered a better mortgage rate on closing. But, aside from that, don't move a metaphorical muscle as far as your credit's concerned.
It doesn't matter how good the deal is on the new store card that will let you buy the couch you want for the family room in your new home. Wait till after you've closed. It doesn't matter how badly you want to book a vacation (you'll need one after the stresses of moving) on your existing credit card. Wait till after you've closed. It doesn't matter how much you'd like to impress your new neighbors with a new car. Wait till after you've closed. Really. Don't borrow a penny more.
And don't open or close any accounts. Recent applications and the average age of all your open accounts are both parts of the algorithm used to calculate your score. At this point, adding or closing accounts can't do it any good at all, but are almost bound to do it harm. So do nothing.
Be Strategic with Your Credit Score After Closing on a Home
After all that restraint, you might be tempted to spend, spend, spend. The sofa, the car and the vacation are all within your grasp, along with a million other things that could make your new home perfect. And, it's true, you've just successfully passed a major milestone in your financial life, and maybe deserve a treat or two.
But bear in mind that your credit score can make virtually all your borrowing – and maybe some other stuff – significantly cheaper, and you could be looking for a new auto loan or credit card relatively soon. Indeed, your credit report may even help land you the job you want. So keep an eye on your creditworthiness, and don't go mad.
LendingTree offers an entirely free service (literally – you won't even be asked for your card details) that lets you monitor your credit score every month. It will even tell you why your score's changed and alert you when it improves enough that you could benefit from getting a new mortgage, credit card, personal loan or whatever. Knowledge may be power, but knowing about your credit means more money in your pocket.