When you take out a loan backed by the Federal Housing Administration your lender checks your credit report just prior to the loan closing. Typically, this check occurs the day before the loan closing although it can occur on the day of the closing. Adverse information on your credit report could lead to the cancellation of the loan.
Lenders raise money for new loans by selling existing mortgages to entities including the government-sponsored mortgage company Fannie Mae. Loans sold to Fannie Mae must meet Fannie Mae guidelines and as of 2010, Fannie Mae requires lenders to check an applicant's credit score just prior to the loan closing. Among other things, Fannie Mae buys large quantities of FHA-insured loans. Therefore, FHA lenders have to check your credit before closing although many lenders were already in the habit of doing this prior to the Fannie Mae rule change.
You can only qualify for a mortgage if your credit score meets the minimum required by your lender. You need to have a score of at least 580 for the FHA to insure your loan but your lender may require a credit score in excess of the FHA minimum. You are prequalified for the loan on the basis of your credit score when you submit your loan application but the lender can cancel your application if your score does not meet the minimum standard when reviewed just prior to closing.
When you apply for an FHA loan your lender uses your credit report to calculate your total monthly debt payments. Your lender divides your debt payments into your income to determine your debt-to-income ratio. You cannot get an FHA loan if your DTI ratio exceeds 43 percent. If you take on new credit such as car loan or credit card during the mortgage process that new payment could cause your DTI to rise above the maximum allowed and result in your lender canceling the loan.
Your credit score just prior to the mortgage closing can make or break your loan. Moreover, your lender also verifies your employment and if it transpires that you have lost your job or changed jobs since the start of the mortgage process your lender can cancel or delay the loan closing until you can verify your new income source. Problems that may emerge with the property being financed can also cause an FHA mortgage to fall through at the last minute.