U.S.-Iran war is coming for your credit score, mortgage application

The closure of the Strait of Hormuz caused a worldwide economic ripple effect; It has resulted in soaring prices of everything from gas to medicine and shortages of everything from jet fuel to helium. This affects large companies in the market, from oil giants to airlines, in various ways. But the closing may also be affecting something else: your credit score.

The stalemate between the United States and Iran over the heavily mined strait, which some CEOs say may not be fully opened for another year, does not cause your credit score to drop, but it does cause banks and other credit institutions to monitor consumer loans more closely and tighten their approval processes.

“Nobody’s credit score went down because of Iran. But try getting a mortgage approval with 670 FICO right now and see what happens,” said Alexander Katsman, CEO and founder of Credit Booster AI, an artificial intelligence-powered credit improvement platform.

“We haven’t had a credit recession in a long time, so when we do, it will be worse than people think. It could be terrible,” JPMorgan CEO Jamie Dimon was quoted as saying this week.

But in the here and now, lenders are tightening up where they touch consumers internally, even if not publicly, Katsman says. “They don’t explain it, there is no press release saying ‘we increased our limit from 660 to 700’. It just happens,” he said.

When underwriting layers are tighter and manual review layers are more burdensome, a borrower who started out six months ago suddenly starts receiving “we’ll get back to you” emails that never result in follow-up messages.

Katsman says this is already happening in real time with customers.

“The guy came in last week, 690 FICO, worked at his job for two years, saved $8,000. He was denied a vehicle loan. The same profile was approved in November 2024 with no issues. His credit hasn’t changed. His risk appetite has changed,” he said, adding that the mortgage side is worse.

David Temko, president of C2 Financial, a California-based mortgage broker, said periods of global instability test the discipline of everyone from loan officers to lending institutions, with credit profiles that would otherwise be considered attractive turning into piles of rejection at some, but not all, lenders.

“When risk increases, you will see institutions with strong infrastructure and consistent underwriting remain stable, while others tighten coatings, increase reserves and second-guess filings that were previously allowed to close in a matter of days,” Temko said. he said.

Interest rates don’t tell the whole story

One promising development that supposedly left consumers hopeful that consumers would still be ahead in the 2026 economy was a low-rate environment while inflation was falling; But the war and the rise in oil prices upset the policymaking assumptions of central banks. A new Fed chairman may take office soon, but there was no interest rate cut as expected at the Fed’s FOMC meeting this week, and traders are now betting there will be no rate cuts through 2026.

However, this could further exacerbate an already challenging credit environment.

“Even if interest rates fall, access to credit may still tighten because trust does not show up in the interest rate table,” Temko said.

“Everyone is watching interest rates and waiting for them to drop. But if you can’t get through insurance, a rate cut means nothing,” Katsman said, noting that lenders in the 640-700 range have added documentation requirements that essentially serve as a soft drop.

While the connection between geopolitical conflict and credit scores is subtle, it’s there, says Bobbi Rebell, personal finance expert at consumer credit card comparison site CardRates.com. “Lenders may price in more uncertainty, including the risk of higher inflation. In the case of the Iran war, we saw inflation impact the US economy, and that will naturally make them more cautious,” Rebell said.

Inflation increased by 3.2 percent in March, above the Fed’s 2 percent target.

“They take into account higher risk to themselves because of the instability, and that can impact how they choose to lend,” Rebell said.

Inflation is “rising and rising,” Fed Chairman Jerome Powell said at his FOMC press conference on Wednesday, adding that pressure from oil prices will likely continue. However, he also noted that inflation expectations are short-term, not long-term, and that the long-term outlook is consistent with the central bank’s 2% inflation target.

As for a shift in the FOMC in which more members (albeit in the minority) voted against language that preserved the institutional bias toward cuts, Powell said, “It’s easy to see why.” “That’s a good question. Isn’t it? You see, inflation has risen a little bit temporarily, core inflation is now 3.2, it’s moving a little bit in the wrong direction, and we know that headline inflation is coming from the Gulf and we don’t know how much it will be, we’ll just have to see.”

Even if the rate outlook remains tilted towards an eventual cut, near-term uncertainty could impact credit markets.

“Even if mortgage interest rates fall, access to credit may be more difficult as lenders look to control their risk. It can be confusing for consumers, but it’s important to remember that credit markets don’t just focus on interest rates, they also focus on risk and risk perception,” Rebell said.

The connection between geopolitical shocks and lenders

Mariano Torras, professor of economics and chair of the department of finance and economics at Adelphi University, says there is a real mechanism by which geopolitical shocks translate directly into tighter credit, and the US-Iran war qualifies as such a shock.

“When uncertainty increases, lenders need to change their behavior beyond raising interest rates. Loss assumptions are climbing upward and lenders, already cautious after years of balance sheet fragility, are becoming more defensive,” Torras said. Even if a marginal mortgage clears underwriting, a higher down payment than desired before the war may be required.

“Even if headline interest rates shift downward — an imminent change in Fed leadership is unlikely — the effective cost of credit could rise if fewer borrowers qualify,” Torras said. He calls this channel, through which geopolitical shocks propagate not just through prices but also through access, the “risk channel.”

According to Katsman, the obstacles to getting a loan are increasing. “They don’t say no, but they ask for so much paperwork that people give up,” he said, noting that some customers check their credit before trying to get a mortgage and are lulled into a false sense of security.

Most households, even those with adequate credit, will bear the consequences, Torras says. But this means fewer car loans and mortgages, leading to reduced consumption. Torras fears that today’s tighter credit market could be a harbinger of what a more systematic credit unraveling would actually look like. “It doesn’t necessarily have to be a dramatic accident out of the blue, but doors that used to be open have to constantly close,” Torras said.

Meanwhile, Madison, Wis. Jeremy Schachter, branch manager at Fairway Independent Mortgage, a national mortgage lender based in London, is processing applications as usual but fears a longer economic shock from the war could lead to a credit crunch similar to that experienced during Covid. “When there is instability in the world over a long period of time, lenders tighten their guidelines as well as their risk tolerance,” Schachter said.

During Covid, lenders have started to impose stricter rules, especially in the jumbo mortgage space. Investors are starting to have higher credit score requirements, more documentation for income stability and more verification, he said.

For now, some lenders are promising to stick to the basics of lending.

Dean Lyulkin, CEO of small business lending platform Cardiff, said: “We will not tighten underwriting standards just because of geopolitical noise. If small businesses continue to generate stable income and meet their obligations, capital will remain available.”

Approval rates, redemption behavior and loss curves largely track where they were before the Iran conflict, Lyulkin said.

“We have to make forward-looking assumptions every day, but stable real-time metrics carry great weight,” Lyulkin said, adding that credit quality and real-time portfolio performance resulting from the application flow still remain relevant. “Will some lenders get worried and withdraw? Of course,” Lyulkin added, but any lender that withdraws risks losing customers to competitors.

Katsman says the least thing consumers should do now if a large purchase is planned is to obtain a credit report in advance. “People check Credit Karma, see the same number as before, and assume everything is fine. Then they walk into a dealership and get caught off guard,” he said. He added that he had observed an increase in clients coming in after surprise rejections, “not because something was wrong with their reporting, but because the lending landscape was changing under their feet.”