New Debt Before Closing a Mortgage

There are two separate issues when you are considering taking on new debt before closing on a mortgage.

  • Will getting a new consumer loan impact your credit score enough to affect the mortgage interest rate? The answer to this is ‘maybe’. The algorithms that the credit agencies use to score are proprietary and impenetrable; it is impossible to know in advance how taking on new debt will affect your credit score. You can ask your lender what your middle credit score is currently (note: lenders use a tri-merge mortgage credit report with three scores; the score that you receive if you go online to the credit bureaus is often not what a lender gets on the tri-merge), and find out what the cut-off is for the next pricing tier for the loan program you are getting. If you’re credit score is more than 20 points above that pricing tier cut-off, you are probably fine to get the new loan (note ‘probably’). For example, if the pricing on the loan program you have chosen changes when the credit score drops below 720, and your credit score is 740 or above, the new debt should not drop your score enough to matter. However, if you are close to a pricing cut-off be very careful. A drop from 723 to 719, for example, could cost .250 points in loan fee, or more. This is .25% of the loan amount; on a $500,000 loan that would be $1250.
  • Will getting the new debt keep me from qualifying for my new loan? This question is easier to answer. If you are in the process of getting a mortgage, or have been pre-approved, call your lender with the details of the proposed payment on the new consumer loan. The lender should be able to tell you definitively whether, and to what degree, your qualification would be affected by taking on the new loan.

The bottom line is that this is a question for your mortgage lender. There is no yes or no answer, because the answer depends on your individual financial situation and loan scenario; let your mortgage lender be your guide.

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