Your credit score plays a big role in whether you qualify for a mortgage and what terms you are offered. Many buyers check their score once, see a number they like and stop paying attention. The trouble is that lenders often look at your credit again before closing, and a few ordinary decisions in the meantime can move your score in the wrong direction.
Tarus Monroe worked as a loan officer and mortgage broker before becoming a Realtor, so he knows how much credit can shape a home purchase. Here are the factors most likely to hurt your score in the months before you buy, and what you can do about each one.
Late or Missed Payments
Payment history is one of the most heavily weighted factors in common credit scoring models. A single payment reported as late can lower your score, and recent late payments tend to matter more than older ones. Set up automatic minimum payments on every account so nothing slips through the cracks. If you do miss a due date, pay as soon as you can. Creditors generally do not report a payment as late to the credit bureaus until it is at least 30 days past due.
High Credit Card Balances
Credit utilization compares your revolving balances to your credit limits. High balances relative to your limits can pull your score down even if you pay in full every month, because card issuers usually report the balance shown on your statement. Paying down balances before the statement closes can help, and keeping balances low in the months before you apply is one of the more direct ways to support your score.
New Accounts and Hard Inquiries
When you apply for credit, the lender usually pulls your report, creating a hard inquiry. Each inquiry may have a small effect on your score. A new account can also lower the average age of your accounts and add a monthly payment to your debt-to-income ratio. Store card offers at checkout are easy to accept without thinking, so make it a rule to say no until after closing.
Checking your own credit is a soft inquiry and does not affect your score, so feel free to monitor your reports.
Rate Shopping the Smart Way
Comparing mortgage lenders is worth the effort. Credit scoring models generally treat multiple mortgage inquiries made within a short period as a single inquiry. The practical takeaway: do your comparison shopping within a focused window rather than spreading applications out over several months. The home loan options section of the buyer's guide explains what to compare.
Closing Old Accounts
Paying off a credit card feels like a good reason to close it, but closing an account removes its credit limit from your utilization calculation, which can make your remaining balances look larger. Older accounts also contribute to the length of your credit history. In many cases it makes sense to leave a paid-off, no-fee card open and use it occasionally for a small purchase you pay off right away.
Collections and Medical Debt
Accounts sent to collections can weigh on your score, and how a paid collection is treated depends on the scoring model being used. Before you pay off, settle or negotiate an old collection, talk with your lender. Loan approval requirements and score impact are not always the same thing, and the timing of a payment can matter. If you reach a settlement, get the terms in writing.
Medical debt is treated differently from other debt in some cases, and credit bureau policies and regulations around reporting medical collections have changed in recent years. If you have medical bills in collections, check how they appear on your reports and ask your lender how they will be handled.
Errors on Your Credit Report
Mistakes happen: accounts that are not yours, on-time payments reported as late, or debts you paid off still showing as owed. You can get free copies of your reports from the three nationwide credit bureaus at AnnualCreditReport.com, the source for free credit reports authorized by federal law. If you find an error, dispute it with the credit bureau and with the company that supplied the information. Disputes take time, so review your reports well before you plan to apply, and let your lender know about any open disputes, since they can affect underwriting.
Financing Furniture or a Car Before Closing
New debt after your pre-approval is a common reason closings get delayed. A new car payment or a zero-interest furniture plan adds an inquiry, a new account and a new monthly payment, all of which can change the numbers your loan approval was based on. The new sofa can wait until you have the keys. For more on what to avoid between contract and closing, see first-time buyer mistakes to avoid in DFW and the getting ready section of the buyer's guide.
Get Guidance Before You Make Changes
This is general information, and every credit profile is different. Before you open, close or pay off accounts, confirm the best approach with a mortgage lender or a reputable nonprofit credit counselor. When you are ready to plan your purchase, contact Tarus. Tarus Monroe can help you line up your credit, financing and home search on one timeline.