A home is likely the biggest purchase someone will make in their life, and more often than not, they’re going to need a mortgage to make the purchase. Unfortunately, shopping around for a mortgage can impact the buyer’s credit score, which can make it more difficult for them to be approved or get a good interest rate. Buyers can use the following tips, however, to reduce or eliminate the impact on their credit score.
Know Your Own Score
The first step every buyer should take is to check their credit on their own. Many people have errors on their credit report that they aren’t aware of and that are impacting their credit score. Everyone is entitled to one free report from each credit reporting agency each year. Request this, look for any errors, and dispute them. It may take a little bit for the errors to disappear from the credit report, but once it’s done, the credit score will increase.
Increase Credit Score
A low credit score can mean a higher interest rate or being unable to get approved for a mortgage, so if there is anything that can be done to increase the credit score, it’s something that should be done well before applying for a mortgage. Pay off as much credit card or other types of debt as possible, so there is a lower ratio of debt to income. Give it at least a month or two to be removed from the credit report, then check the score. At this point, the score should increase, which can help when applying for a mortgage.
Start Saving More Money
This doesn’t really have to do with shopping for a mortgage, but it is a good idea when buying a home. The purchase of a home is expensive in and of itself, but there’s a lot more to buy after the purchase. Many home buyers end up applying for new credit after buying a home, which means they’ll end up with a lower credit score and a higher debt to income ratio. Instead, start saving while preparing to get a mortgage beyond the amount needed for a down payment. This money will help with any immediate purchases as well as emergencies in the future.
Avoid New Debt
While it’s tempting to buy a new car at the same time or get a new credit card for all the expenses after a home is purchased, avoid doing this. It’s much better to take the time to save for these expenses before applying for a mortgage. When there is new debt on the credit report, it can impact the buyer’s ability to be approved for a mortgage or to have a low interest rate. If the buyer was pre-qualified, it can impact whether they are approved or not once they find a home to buy, which may mean they then can’t afford the home they wanted.
Look Into Pre-Qualification
Pre-qualification doesn’t involve a credit check, so it’s a good way for a buyer to find out how much they can afford and whether they can obtain a mortgage from that lender. The pre-qualification is based on the financial information given from the buyer to the lender, so the actual mortgage may not be exactly what the buyer pre-qualified for, but a pre-qualification is a good indication of what the buyer can spend and is recommended before looking at homes.
When it’s time to become pre-approved for a mortgage, it’s best to shop quickly. A pre-approval is a hard inquiry, so it does impact the credit score. However, as long as there aren’t any inquiries for other types of credit and the pre-approvals or quotes are all done within a two-week period, they will only count as a single inquiry and won’t have a huge impact on the credit score. If a home buyer is pre-approved by four mortgage lenders, but this all happens within a two-week period, only one inquiry will show up on their credit report.
If you’re planning on getting a mortgage to buy a home, start by looking into your credit score and seeing what can be improved. Then, when you are ready to buy a home, consider a pre-qualification instead of a pre-approval. Once you have found a home, shop for a mortgage quickly. It is a good idea to get multiple offers before obtaining a mortgage so you can get the best rates, but if you want to make sure your credit score isn’t impacted, do this quickly.