What If My Credit Score Drops Before Closing?

A credit score reflects an individual’s financial reliability and can fluctuate based on various activities. Lenders use this score to assess a borrower’s likelihood of repaying debts, especially for home loans or other significant credit. Understanding score behavior is important during the period leading up to loan approval and closing.

Why Your Credit Score Matters at Closing

Lenders perform a final credit check before closing to ensure a borrower’s financial situation hasn’t significantly changed since the initial application. A material change in creditworthiness indicates increased risk.

A lower credit score can directly influence loan terms, potentially leading to a higher annual percentage rate (APR) and adding thousands to the total loan cost. A substantial drop could even jeopardize loan approval, causing delays or outright denial. Lenders confirm the initial financial profile remains consistent.

Common Causes of Credit Score Fluctuations

Applying for new credit before closing is a common reason for a credit score to drop. Each new credit application, like for a credit card or car loan, results in a hard inquiry, which can slightly lower the score. These new credit lines also increase a borrower’s total debt burden and debt-to-income ratio, signaling increased financial risk.

Making large purchases on existing credit cards can also negatively impact a score. Even if the intention is to pay off the balance quickly, a sudden increase in credit utilization, which is the amount of credit used compared to the total available credit, can temporarily depress scores.

Missing a payment or making a late payment on any existing debt is another significant factor that can cause a score to decline rapidly. Payment history is a primary component of credit scoring models, and even a single late payment can have a substantial negative effect.

Closing old credit accounts can also unexpectedly lower a credit score. While it might seem like a responsible financial move, closing an account reduces total available credit and can shorten the average age of a borrower’s credit history. Both factors can negatively influence credit scoring algorithms.

What to Do If Your Score Drops

If a credit score drops unexpectedly before closing, the immediate and most important action is to contact the loan officer or lender. Open communication allows the borrower to explain the situation and explore potential solutions. Lenders may have specific policies or alternative options available depending on the severity of the score drop and the reason behind it.

Borrowers should also obtain current credit reports from all three major credit bureaus: Equifax, Experian, and TransUnion. Reviewing these reports helps identify any errors or fraudulent activity that might be contributing to the score decrease. Disputing inaccuracies can take time, but a quick review can confirm if legitimate financial actions caused the change. Gathering documentation to explain any legitimate but impactful financial events, such as a medical emergency or an unexpected job change, can also be beneficial in discussions with the lender.

Maintaining Credit Stability During Closing

To prevent a credit score drop, borrowers should avoid applying for any new credit from the moment their loan is approved until after closing. This includes store credit cards, personal loans, or even financing a new vehicle. Each application generates a hard inquiry, which can negatively impact the score.

Refraining from making any large purchases, even if planning to pay cash, is also advisable. Large transactions, especially those involving financing, can alter a borrower’s financial stability and debt profile.

It is also crucial to continue paying all existing bills on time and in full. Maintaining a perfect payment history during this period is paramount, as payment punctuality is a significant component of credit scores.

Borrowers should also avoid closing any existing credit accounts, as this can reduce available credit and negatively affect credit utilization ratios and credit history length. Regularly monitoring credit reports for any unexpected activity or changes can help identify potential issues early.