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How Credit Affects The Home Buying Process

Feb 16, 2022

One of the questions we hear often is how does one's credit score affect the home buying process. It’s no secret that credit and your credit score play a large role in buying a house, but what exactly does it affect, how does it impact your loan product options, and what, if anything, can you do to improve it? 


When thinking about getting approved for a mortgage, it’s important to understand that your lender is evaluating your ability, your stability and willingness to repay the money they lend you. Your credit score tells lenders just how likely you are to pay your mortgage on time every month. Understanding what impacts your credit score is an important first step in understanding how it plays into the mortgage process.


What Impacts a Credit Score?

Several factors play into the makeup of your credit score. This includes your payment history, the length of your credit history, the amount you owe, your mix of credit in use, and new credit. Because your credit score is made up of many components, it can also be affected by many components.


Things that can negatively impact your credit score include:


  • Late payments. Late payments in general, as well as those that lead to charge-off’s and collection accounts, negatively impact your credit score.
  • High credit utilization. This means that you are typically using over 50% of your available credit.
  • Numerous credit inquiries in a short time period of time can have a negative impact on your credit as well. Don’t worry, pulling your credit at pre-approval and at the start of the application won’t drastically hurt your score and, re-pulling it should have no noticeable impact.
  • Too much – or too little – credit can also have a negative impact. You need a credit history to qualify for a mortgage, but you also don’t want to open lines of credit for no reason.


Now that you understand what might negative impact your credit score, here are some useful credit-related tips to help you prepare for the home loan application process:


  • Pay debts on time every month and avoid making late payments of 30 days or greater because they will adversely impact credit.
  • Be careful not to overuse credit cards. Pay off as much of your balance monthly as possible, not just the minimum payment due.
  • Avoid closing accounts with zero balances. It’s best to leave them open until they automatically drop off of your credit report.
  • If there are outstanding collections, it’s best to work out a repayment plan with the collection agency and only agree to make payment in full if the collection agency agrees to delete the collection account upon their receipt of the full balance.


How Your Credit Score Affects Your Mortgage Package

Lenders often operate on risk-based pricing. This means that they will consider every risk associated with your financial picture to determine your mortgage rate. The difference between a “poor” and a “good” credit score could mean tens of thousands of dollars in savings over the life of your home loan. 


It’s important to recognize that we don’t have one credit score. We actually have three, and each one is considered by your lender when applying for a mortgage. Your lender will consider your median credit score, your credit history, debt to income ratio, and other parts of your entire financial picture to decide your final mortgage rate. 


One last thing to recognize is that there are credit requirements for every mortgage product. Each loan product is designed to help those in specific situations achieve homeownership and therefore vary in requirements and guidelines for qualification. Your lender will work with you to find the best loan product for you and your specific situation. 


Credit is a tricky part of the home buying process, but the good thing is that it is the job of your loan officer to help you understand your financial picture, how it affects your home buying process, and even help guide you to the right resources should you need help improving your credit score to purchase a home. 


If you are struggling with your credit, we have a network of credit counselors that are happy to help you determine how to pay off debts and will give specific instructions to help you improve your credit score. Contact one of our loan officers today and start your home buying process.

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