If you’re looking for a new home, you probably already know that a mortgage lender will consider your credit score, percentage of available credit used and debt-to-income (DTI) ratio. If your score is too low or your credit utilization or DTI ratio is too high, the lender may charge you a high interest rate or reject your loan application altogether.
Buyers often run into trouble because they don’t understand a key fact about how mortgage lenders vet candidates. A lender checks a borrower’s credit when an application is submitted, and again shortly before closing. If a borrower uses credit cards to buy furniture and appliances or to pay for moving costs, the person’s credit score, utilization ratio and DTI ratio may rise enough to cause the lender to raise the interest rate or decide not to grant a mortgage at all.
How to Protect Your Credit and Get a Mortgage
While you’re in the process of house hunting, it’s important to keep your credit in the best shape it can be and to avoid using credit cards as much as possible. If you normally use credit cards for food, clothing and entertainment, don’t. Use cash or a debit card, or don’t buy certain things at all. If you must make an important purchase, ask yourself if you can live without it until after you’ve closed on your home.
If you receive a letter inviting you to apply for a new credit card with a low introductory rate or rewards, it can be tempting, but you shouldn’t apply while you’re looking for a new home. Too many hard inquiries in a short period of time can hurt your credit score. You shouldn’t apply for an auto loan while house hunting for the same reason.
Make Sure You Have Enough Savings
You’ll have to save money for a down payment, but you shouldn’t put all your savings toward that. If you do, you’ll be left with no cushion to deal with any unexpected bills for things such as medical treatments or car repairs. You also won’t have funds readily available to buy furniture and appliances before you move into your new house. That means you may be tempted or forced to use credit cards, which may jeopardize your ability to obtain a mortgage.
Don’t Lose out on Your Dream Home
Even if your mortgage application has been approved, that doesn’t mean the decision is final. The lender will check your credit again before you close on the house. A sudden rise in credit card balances and a higher utilization ratio and DTI ratio could cause the lender to change its decision and to reject your mortgage application. Set aside money for any planned or unexpected expenses you may encounter so you can avoid using credit cards as much as possible until you’ve closed on your new house.
This article is intended for informational purposes only and should not be construed as professional or legal advice.
