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My wife and I (usually) have excellent credit. TransUninion had me at 790 and other agencies well into the 800s. Our lenders have already prequalified us for our home, and sent the ratings they got for us in the mail (790).

Yesterday I noticed our score with TransUnion dropped to the 650s. From what I can tell nothing is wrong on the reports. The only things I can think of that would have caused this are:

  • I had to put $4,000 on a credit line for computer equipment I need for work (December)
  • My wife's parents had me co-sign on a new car they bought her for Christmas (December: $20,000)
  • We've had 3 lenders running our credit to PQ us for a mortgage

We're going house hunting next week, and I'm kind of freaking out. We were basically a lock for the lowest available APR. Will this come up during the underwriting and knock us out of the rate we were looking to get? Is the score I got PQ for locked in? What should I be prepared for? Is there anything I can or should do now?

Edit: So the plot thickens slightly. I just bought a credit report for myself to look at from my FICO, and TransUnion still reports my score as 774. The places I've seen 650s is from credit monitoring services (from my financial institutions like Chase, AMEX, etc.). Now I'm curious why they're saying my credit took a huge hit, but my actual report is only showing a drop by about 20 points.

Edit 2: I found the discrepancy. My VantageScore 3.0 dropped significantly, but not my FICO score. I bought a credit report for myself, and it reports 774 still. Assuming most major lenders only use FICO scores, I assume all is still well and I've panicked over nothing.

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    Did the December purchases happen after the pre-qualification? Also, are you sure it's pre-qualification and not pre-approval? The former doesn't require a credit check (but maybe they're just being pro-active on that front). – Hart CO Jan 10 at 18:53
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    Are her parents making the car payments? Why did you need to co-sign? – D Stanley Jan 10 at 18:58
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    If your credit score was 790+, why did they need to help you build credit? Never, never co-sign a loan. – Kevin Jan 10 at 19:50
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    @d-b Unless you're rather wealthy, paying $20k in cash for a car is simply a bad idea almost no matter how you slice it. I'd rather have that $20k sitting around for a real emergency, while I slowly pay off a 0% interest loan for the car. There's nothing wrong with that... it's actually smart. Heck, I'd much rather put that $20k into my mortgage instead and save a ton in the long run. There's absolutely nothing wrong with using credit and loans, especially for a car. – only_pro Jan 11 at 16:24
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    @only_pro Most 0% interest car loans result in forfeiting discounts you could have received on the car if you'd paid cash. You will usually still come out ahead by paying cash for a car. An exception would be if you're using a 0% intro APR on a card or something like that. At any rate, taking out almost any loan soon before purchasing a house is quite a bad idea. – reirab Jan 11 at 21:00
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Each of the recent changes you listed has the following effect on your credit score:

  1. $4K on credit line: increases your debt utilization. The smaller the denominator (sum of all credit limits of CC's and lines of credit) the more this will lower your score. The good news is, within 30 days of paying that off your score will jump back up.
  2. Co-signing a $20K loan: probably added one hard inquiry to your report (approx 5-10 point hit for 2-4 months). The loan itself may not have much impact on your score otherwise. It will slightly lower your overall average age of accounts which could cause a slight dip, but it could also increase your credit mix, providing a slight bump to your score. Obviously the impact of each depends on the rest of your credit profile, but typically these two come close to balancing each other out. Over time with perfect payment history you'll likely see small increases due to this loan.
  3. Inquiries from multiple mortgage lenders: as long as they are all for mortgages, they will collapse into a single hard inquiry. At worst you should have 1 new mortgage inquiry and 1 new car loan inquiry. (Approx 5-15 points for 2-12 months.)

Other than score, the $20K loan could affect your DTI ratio for how much house you can afford, if you were butting up against the edge that you were able to borrow. Worst case though is it would reduce the amount of the loan they would give you by approx $20K. (More if the car loan interest rate is high.)

Recommendation: if your mortgage rate drops due to the score decrease, then pay off the $4K and wait 1-2 months and try again.

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    This is important because most people don't realize when they "co-sign" for a loan, other lenders treat it like it was your loan. The full amount of the loan and monthly payment is used in their calculations as if you were the sole signer on the loan. – JPhi1618 Jan 10 at 21:13
  • In my experience in the industry, each Lenders inquiry will appear on the credit report and affect the score. A small number should affect the score significantly, but if you had applied to a dozen different lenders, it will tell another prospective lender that you had been declined and they will look closer to determine why. The total number of inquiries recorded over a period will also affect score, but also the type of credit, whether the credit is secured, and your repayment history have a greater effect. – Hearth Jan 11 at 0:27
  • @Hearth - I agree all the inquires will show up on the report, but I believe those in specific categories do collapse if they occur within a certain time frame (45 days perhaps?). Note that each bureau and their respective models may treat them differently. Here's some more thorough research I did a while back: money.stackexchange.com/a/77630/17718 – TTT Jan 11 at 1:52
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    What most people don’t realise is that when they co-sign a loan it is their debt. If the other person doesn’t pay, you pay. – gnasher729 Jan 11 at 8:56
  • "The loan itself should not affect your score otherwise." -- why wouldn't that effect their debt utilization? – Yakk Jan 11 at 17:29
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Unfortunately, you've committed a bit of a home-buying blunder. Large new lines of credit close to home purchase are not advised. New lines of credit after an offer has been accepted have caused many purchases to fall through as buyers become unable to secure financing (until closing, financing is often not guaranteed). The good news here is that you did this prior to putting in offers rather than after one was accepted.

Whether or not you still qualify for a loan of the same amount will primarily depend on your debt to income (DTI) ratio after the new lines of credit are factored in. As a co-signor you have full obligation to pay, so it adversely affects your DTI, it also adversely affects your credit score in the short-term. The rate you qualify for could definitely be affected by such a substantial decrease in score.

Over time your score will improve given no late-payments, so if you can't get a favorable rate now you may end up waiting. For most lenders, a pre-qualification doesn't guarantee much if anything, but follow up with your lender to see what the fallout is.

Edit: Your update makes sense, that seemed like a huge score drop from not much activity.

  • The good news is that OP is not closing next week. But starting the process of house hunting next week. OP may now be limited to being approved for less total mortgage because he has assumed more debt. – R. Hamilton Jan 10 at 19:14
  • @R.Hamilton Definitely, re-worded to emphasize that this situation is not dire. – Hart CO Jan 10 at 19:18
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Will this come up during the underwriting?

Yes. You will have to disclose all of your liabilities when you make the loan application.

Is the score I got PQ for locked in?

It depends on the lender. They might run another hard credit check, or they might not. If they do, you have to authorize it (but if you don't authorize it and they "require" one then they may just deny your application). Reviewing your credit score is only one part of their decision-making process. They'll be more interested in your debt:income ratio when they make their overall yes/no decision and the amount they can offer you (which you've just affected quite dramatically with $24K additional liabilities); whereas your credit score is more likely to be used to determine what APR they offer you.

What should I be prepared for?

Be prepared for a little extra scrutiny. Lenders often advise against taking out other forms of credit at the same time as applying for a mortgage, specifically because it complicates the paper trail supporting your current debt:income ratio. If you are moving a lot of assets/liabilities around it could look like you're trying to hide something about your financial health from the underwriter.

Is there anything I can or should do now?

Check your PQ letter for any terms/disclaimers about its validity - especially any dependencies/assumptions declared in the letter about your current financial status and whether any changes to your financial status would invalidate the letter. If you have questions or need a new PQ letter, ask your lender. Be honest with them about your new debts and why you've taken them on. This isn't the end of the world, it's just a bit more complicated for the lender to get all your ducks in a row now.

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A pre-qualification is simply a statement of what you may be eligible for based on the information you've provided. This is different from pre-approval, and the lender does not typically run a hard inquiry for a pre-qualification. So what you pre-qualify for and what you're approved for will be different based on that hard inquiry when you're actually applying for credit. The difference is explained nicely by Experian in the following article: https://www.experian.com/blogs/ask-experian/pre-approved-vs-pre-qualified-whats-the-difference/

Having a high balance-to-limit ratio on your revolving balances will hit hard. So if you put $4K on your CC and that's most of your limit, it'll affect your score adversely. The fix is to pay down that balance, but it's uncertain when that'll reflect on your score. Co-signing will also add a hard inquiry and a loan balance to your report, but there is little you can do about this.

So (1) the information in your "PQ" isn't locked in unless otherwise obtained in writing.(2) You should definitely be prepared to receive an offer commensurate with your creditworthiness, although this isn't the only factor they're going to look at. (3) I'm not sure I can answer those other questions without making big assumptions.

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The number of "recent hard inquiries into your credit history" is a factor that will affect your credit score. So, for example, if you were in a bad financial situation and are attempting to take out loans to bail yourself out; but let's say that one lender after another is rejecting you, so you hop from one institution to another looking for a 'dupe', then your score is going to reflect that.

In contrast, if you approach a few institutions for mortgage rates- each of those lenders are going to look at your credit, and they will understand if you explain to them that other institutions have recently run your history also. They are more concerned with things like payment history, judgements, bankruptcies, etc- things which would affect your ability to repay a new loan.

You mentioned that you didn't merely shop for mortgage interest rates, but actually prequalified with multiple lenders. You could have done the first step without going all the way and doing the latter. In fact, getting multiple prequalifications sends the message "We're going to take out at least one loan, AND potentially multiple loans from separate institutions". This is probably not the message that you wanted to convey.

However, all is not lost. Hopefully among the prequalifications you received, at least one met your needs and criteria, and the other lenders can be simply told that you went with a different institution. After a period of time the hard inquiries will play a lesser role in your credit score, and eventually they will drop off of it completely. As long as you're not planning to take out ANOTHER mortgage or big loan, it's not something that you need to be overly concerned about.

  • When I want to get the best rate, how should I approach that going forward? I have 3 lenders waiting for me to tell them I've put an offer on a house so they can "lock in" my final rate. Will that step hit my credit if it happens from 3 lenders? Can I get that rate some other way? – MrDuk Jan 10 at 19:15
  • @MrDuk The lender's rhetoric on "locking in a rate" is usually self serving- they would (of course) like you to sign something to guarantee your business, rather than just quoting you a number. There are online resources (like bankrate.com) that will show you the rates, and more importantly, the fees from various lenders, which if nothing else can be used as a baseline. If a lender is unwilling to tell you information like rates, fees, and closing costs then that's a big red flag to go elsewhere. – Derek_6424246 Jan 10 at 19:45
  • "The number of "recent hard inquiries into your credit history" is a factor that will affect your credit score." True, but only by a few points, max ~10–15. Does not explain the reported 100-point drop. – Kevin Jan 10 at 20:55

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