Buying a new home is an exciting time, filled with possibilities. It can also be incredibly stressful, as you prepare to make one of the biggest expenditures of your life.
Well-meaning friends and family members may have given you plenty of advice on how to improve your credit or get a better deal on your house, but what many people fail to think about is what you should avoid doing in the months leading up to the purchase of a home. Avoiding credit mistakes is critical if you want to get the best possible interest rate on your mortgage. Like other types of loans, the interest rate on your mortgage is determined in large part by your credit score.
The lower your credit score, the higher your interest rate will be — and the more money you will pay over time in interest on your mortgage. It is in your best interest to keep your credit score as high as possible as you get ready to buy a house. This includes avoiding the following common mistakes.
Too Many Hard Credit Pulls
There are two types of inquiries that a person or company can make on your credit report, which are known as “hard” pulls and “soft” pulls. A hard pull typically occurs when a bank or credit card company checks your credit before making a lending decision, and must generally be authorized by the borrower. Similarly, a soft pull occurs when a person or company checks your credit, but it is typically less in-depth, provides less information, and is only used for prequalification.
Hard pulls impact your credit score, and could lower your score by a few points. They stay on your credit report for two years. A number of hard pulls at once — for example, applying for a lot of credit cards within a short period of time — could indicate that you are short on cash, and are therefore a credit risk. In contrast, soft pulls do not impact your credit score.
If you are considering buying a home, avoid hard credit pulls as much as possible. This means that you should not apply for a car loan, credit cards, a personal loan, or student loan within several months of purchasing a home. Hard pulls will show up on your credit report, so check it to verify the number before applying for a mortgage. If you have hard pulls on your report that you have not authorized, you can dispute the hard pull with the credit bureau and request that it be removed.
Increasing Your Credit Utilization
Credit utilization is the ratio of your debt to your credit limits. It is the percentage of your credit limit that is being used. For example, if you currently have a $10,000 credit card limit and have a $5,000 balance, then your credit utilization is 50% for that card. Ideally, your total credit utilization should be 30% or less. Credit utilization is an important factor in your total credit score.
One of the ways that many people sabotage their credit scores is through increasing their credit utilization ratios inadvertently by closing a credit card.
When you close a credit card, that limit is no longer included in the total measured against your balance. For example, if you have a total credit limit across all credit cards of $30,000 and a balance of $10,000, then your credit utilization is 30%. However, if you close a card with a $10,000 limit, then your credit utilization will shoot up to 50% — which can send your credit score tumbling.
When you are getting ready to buy a house, do not close any of your credit card accounts — even if you do not use them. If you have already closed an account, you can fix your credit utilization score by requesting a credit line increase from your credit card company. This will likely result in a hard pull on your credit report, but if it is granted, then it should bring your credit utilization ratio back down, which should more than make up for the temporary drop in your credit score.
Inaccuracies on Your Credit Report
One of the pitfalls of modern society is that we have so much information available to us, and yet less time than ever to review it. This is especially true when it comes to financial information.
Having errors on your credit report — such as hard pulls that you never authorized — can lower your credit score, resulting in a higher interest rate on loans. That is why it is vital to review your credit report at least annually (or more frequently if you are planning to make a major purchase like a house) to fix any errors.
At REX Home Loans, your credit report is always free. It lets you know exactly where you stand, so that there are no surprises.
If you discover any inaccuracies on your credit report, start by informing the credit bureau about the mistakes. Include a copy of the documents that support your argument, and be sure to identify each error that you have identified, along with why you believe that the information is inaccurate.
Then, request that the item be deleted or corrected. In most cases, the credit bureau must investigate your request within thirty days.
Next, write to the creditor who made the report, informing them that you are disputing the information provided to the credit bureau and provide the same information.
Going through this process can help to raise your credit score and protect you from fraud as you carefully review your credit on a regular basis.
Closing Thoughts on Credit & Home Buying
While buying a house can be stressful, you can make the prospect of obtaining a good interest rate on a mortgage more likely by taking these steps. Protecting your credit score is possible by understanding how credit scores are calculated and by avoiding these credit mistakes.
Tom is a millennial blogger who runs a personal finance site centered around achieving FIRE (financial independence – retire early). You can find him on Twitter @FIREdUpMillenn to follow his journey and stay updated on his newest