While they certainly aren’t the only relevant factor, your credit scores have a big influence on your ability to get a home loan. Although you may feel like you don’t have much control over your scores, being smart about how you manage things like loans and credit cards, and avoiding these four common credit mistakes during the mortgage process, will make the road to closing a lot less bumpy.
Mistake #1: Being Afraid to Rate Shop
True or false: Every time your credit reports are pulled, your credit scores drop. Total myth, thankfully.
First off, you can always check your own credit reports without fear of credit score damage. Second, FICO and VantageScore's credit scoring models have been built with logic that prevents a score drop should, when you are shopping around for the best loan rates and terms, several lenders pull credit reports to pre-qualify you.
How does the logic work? Both FICO and VantageScore consider several mortgage inquiries within a short period of time an act of shopping for one loan and score those inquiries as one search for credit. The impact to your scores will mirror your intention: to have one mortgage loan, not several.
"It’s a mathematic certainty that any new debt will increase your debt-to-income (DTI) ratio, a measurement of your financial capacity to afford a new mortgage."
Mistake #2: Forgetting Due Dates
If you’re in your 20s, you’re newer to credit. And, it’s unlikely you learned about credit management in a college course. It’s just not taught anywhere.
There is a temptation to dictate the rules of engagement with your lenders, but please promise you won’t go there: Your terms have been agreed upon in writing. If you want to send your credit scores spiraling downward, then go ahead and miss a payment or two on your financial obligations. Do it during the underwriting process and you might as well re-up your apartment lease.
It is essential that you make every single payment on time prior to applying for your loan, and also throughout your entire mortgage underwriting process. Most mortgage lenders will pull your credit reports a few days or weeks before closing and any new delinquencies will show up. This could disqualify you from closing even on an already approved loan.
Mistake #3: Living Like a Baller on Credit Cards
One of the biggest mistakes you can make prior to applying for or closing on a mortgage is to suddenly rack up large balances on your credit card accounts. Both FICO and VantageScore base a significant portion of your credit score points on credit card debt-related metrics. This includes the relationship between your credit card balances and your credit card limits, as well as the number of accounts with a balance. The higher your balance-to-limit ratios and the more accounts with a balance, the lower you credit scores will be.
Mistake #4: Opening a New Credit Account
When you apply for and open new accounts before or during the mortgage process, you may be putting your loan approval at risk. First, the action of applying for and/or opening a new account can lower your credit scores and the reduction could place you into a different rate tier, which could lead to a higher interest rate.
More bad news? It’s a mathematic certainty that any new debt will increase your debt-to-income (DTI) ratio, a measurement of your financial capacity to afford a new mortgage. A decrease in credit scores or an increase in your DTI will, at best, need to be explained to the lender and, worst case scenario, might put your mortgage approval and closing on hold for the foreseeable future.