This will be the third version of this post since I started writing The Mortgage Porter in late 2009. Things have overall changed for the better for consumers when it comes to the closing procedure. Last month, two new disclosures, the Loan Estimate and Closing Disclosure, were introduced replacing the Good Faith Estimate and HUD-1 Settlement Statement effective for loan applications dated October 3, 2015 and after. This post applies to loans originated after October 3, 2015. If your loan application is dated prior to October 3, 2015, you should refer to this post instead.
A “soft” credit check is just prior to closing on your mortgage. This is to ensure that no new debt was obtained during the mortgage process and that the information on your final application that you sign at closing still represents your financial scenario.
A soft credit check does not impact your credit scores. It will disclose any new debts and credit inquiries. If there are changes to your credit revealed from the soft credit check, be prepared to explain and document whether or not new credit was obtained. Even if the credit card you decided to open during the transaction has not been used, you will still need to provide documentation regarding this new potential debt.
A “hard” credit check may take place if your existing credit report is set to expire before closing. Different than a soft credit check, the mortgage company will order a new credit report and the terms of your mortgage will be impacted by what the new report discloses, including any changes to your credit scores. This includes your current pricing of the loan and qualifying.
It’s really best to not obtain any new credit during the mortgage process and avoid applying or inquiring for any credit. Even when the creditor states “six months same as cash” or “this won’t impact your credit” – don’t buy it! If you do feel you need to make a purchase just prior or during the mortgage process, please discuss it with your mortgage professional first. A new car or big screen tv for your home may delay the purchase of your new home.
EDITORS NOTE: With the introduction of CFPB’s Loan Estimate and Closing Estimate, some of the information below may not apply if your loan application was originated October 3, 2015 or later as the 2010 Good Faith Estimate and HUD-1 Settlement Statement have been retired. Watch for an updated post soon!
When I originally wrote this post back in January 2007, we didn’t have the Good Faith Estimate that HUD created and implemented in 2010. Although this GFE has caused greater confusion and has overall been a failure (a new version is should be available in 2012), the one positive feature about the 2010 GFE is that lenders are bound by what they quoted on their last Good Faith and page three of the HUD-1 Settlement Statement clearly compares what was quoted by the Mortgage Originator and what the final fee at signing is. In addition, there are certain tolerances that limit how much more a fee at closing can be for some of the lender fees.
I am often asked this question during a refinance from homeowners. Your mortgage payment is paid in arrears. For example, your February payment is paying January’s interest. Remember when you bought or refinanced your home and the loan originator stated “you’re going to skip one month’s payment” or “you won’t have another payment due until the following month after closing”? Well this is where that payment essentially catches up with you. (Technically, it’s not “that” payment, you’re just always paying the previous month’s interest).
One of the first-time home buyers I’m currently working with just called me with a few excellent questions. She and her boyfriend have recently made an offer on their next home, with their agent which was accepted. They now have handsome stack of papers from the escrow company (as if the paperwork from the lender wasn’t enough) that caused some questions.