Your credit score may never be more important than it is when you’re applying for a mortgage.
It’s not easy to raise your credit score dramatically in a short period of time. But it is easy to inadvertently lower your credit score quickly. In a best-case scenario, a sudden drop in your credit rating during your mortgage application could merely slow down the underwriting process. In a worst-case scenario, a major change in your credit rating could cause your mortgage lender to back out of the deal before your mortgage is finalized.
If you’ve only got a short time before you intend to buy a home, your primary goal should be to protect your credit score from any sudden, significant drops. Folks with the best credit scores get the best interest rates on their mortgages. People with low scores have trouble finding mortgage lenders—and those that do pay more.
So, if you’re looking to buy a home soon, or if you’re already in the process of getting a mortgage, safeguarding your credit score is absolutely critical. Not sure how to protect your credit score? Here’s what you need to do.
First: Know Where You Stand.
Hopefully, you’re already in the habit of monitoring your credit report regularly. If you’re not, now’s a good time to jump on the credit-monitoring bandwagon. You should definitely review your current credit reports carefully before you apply for a mortgage.
If you spot errors on a credit report, you’ll want to resolve them before you seek financing for your home purchase. (We’ve got detailed directions for disputing credit report errors here, if you need them.)
If your credit history isn’t perfect, don’t panic. Your credit doesn’t need to be perfect to qualify for a mortgage. Remember, your recent credit management behavior counts for a lot. For example, you may be able to qualify for a mortgage just two years after filing for Chapter 7 bankruptcy.
Pay Your Bills On Time.
Buying a home is an exciting time, and preparing to move can be chaotic. But the weeks and months just before you apply for a mortgage is a terrible time to accidentally forget to pay the electric bill.
For lenders, a missed payment is a serious red flag. Credit scores—especially good credit scores—change significantly with missed payments and delinquent accounts. A credit score in the high 700s can drop by nearly 100 points if a single account is marked as 30-days past due. So make doubly sure you dot your i’s and cross your t’s. Get those monthly checks out to pay all of you bills on time.
Don’t Close Any Accounts. Even Ones You’re Not Using.
The total amount of all of the credit available to you is a factor in your credit score. So is the average age of your existing credit accounts.
From a practical standpoint, that means that while you may not be using that line of credit you got from Macy’s a decade ago, keeping the account open is probably helping your credit score.
If you’ve got old accounts with $0 balances, leave them open for now. You can do some credit housekeeping and close unused accounts after you’ve finalized your mortgage.
Don’t Open Any New Lines of Credit, or Make Any Major Purchases.
It can be very, very tempting to apply for new credit cards as you’re shopping for a home.
After all, your new home might need some new stuff to put in it.
Or perhaps you find yourself suddenly interested in a line of credit at the local home improvement store. You’ll be a homeowner and not just a renter soon.
If you want to safeguard your current credit score, resist the urge to apply for new lines of credit. Each time a credit card company or lender reviews your credit to decide whether to let you open an account, the inquiry is recorded as a hard inquiry on your credit report. Too many hard inquiries can make mortgage lenders wary. Plus, hard inquiries lower your credit score.
Also, mortgage lenders generally want to see that your monthly debt obligations—including your new mortgage—will be less than 43% of your monthly income.
Major purchases on your existing credit cards can increase the amount you’re obligated to pay each month. If you suddenly add, say, a new car payment to the mix, or dramatically increase the monthly minimums you need to pay on your existing credit cards because you spent thousands of dollars on new furniture for your new place, you could risk jeopardizing your mortgage approval. (And then where will you put that new dining room set?)
Pay Down Some Debt, But Only If You’ve Got Some Time.
The quickest way to increase your credit score is to pay down existing debt (if you can). Ideally, your revolving credit card debt should be less than 30% of the credit limits on all of your credit cards. Getting your debt to less than 10% of your credit limits is even better.
If you’ve got the means and just a little bit of time, lowering the amount of debt you carry can seriously improve your credit score. And by lowering your monthly repayment obligations, you can help your chances of being approved for a mortgage by carrying less non-mortgage debt.
That said, the time factor is important. Paying down a bunch of debt and then applying for a mortgage before the credit reporting agencies have had a chance to update your credit reports won’t help your case at all.
Can’t wait a month or two for your credit reports to update before you make your home purchase? Then you’d be better off keeping that extra cash in the bank.
Got all that? Basically, if you’re about to apply for a mortgage: Pay your bills on time. Stay the course. And don’t make any sudden changes to your credit profile. (If you’re ready to get that mortgage application going, you can get started with your Morty profile here.)