Last week in Mortgage Missteps, I talked about why you should check your credit score before you apply for a mortgage. This week, I want to discuss some actions that will hurt your credit score, even when it might seem counterintuitive. Once you’ve applied for a mortgage, you don’t want to do anything that will affect your credit score, especially by lowering it so much that you no longer qualify for the mortgage.
Mortgage lenders look at a complex variety of factors when deciding if they can/should give you a loan, and many lenders will often pull your credit a second time right before you close to make sure nothing’s changed. Anything that alters your credit score is a red flag for a lender which could cause them to view you as a higher risk. Read on to learn what affects your credit score and how to avoid damaging it.
Don’t Open New Lines of Credit
Opening a new line of credit, whether it’s a credit card, car, furniture financing or even a home equity line, involves a credit check which lowers your credit score because you’re assuming more debt. This can lower your credit score so much that you no longer qualify for your mortgage, but it can also be a cause of concern for your prospective mortgage lender because, now that you have more debt, you might not be able to afford your new monthly mortgage payment.
Another problem with opening a new credit card is if you don’t use it – or one of your old cards – regularly, your lender will view that unused line of credit more as an unsecured loan, and this could significantly hurt your mortgage application.
Basically, once your lender has pulled your credit and accepted your application, don’t make any financial changes in your life. Just keep paying your bills as you normally would.
Don’t Close Existing Credit Cards/Pay Off Car Loans
Now this might sound counterintuitive, I mean, wouldn’t a mortgage lender want you to have as little other debt as possible when you get a mortgage? Doesn’t paying off debt drive up your credit score?
Well, not really.
One of the factors a mortgage lender considers during a loan application process is your debt-to-earnings ratio. Generally speaking, you don’t want this to be more than 30%; so, if you only have one credit card, but you only have 50% available credit, your credit score will be less. The ideal situation isn’t that you don’t have any credit cards, but that the balance on your cards is relatively low. If you manage to pay off a credit card shortly before you apply for a mortgage, it’s best to keep that card and use it moderately.
Besides providing more available credit, an older credit card gives you a longer, more reliable credit history. If you keep one or more cards that you’ve had for a longer period of time, and you’ve always been good about making regular payments on it and not maxing it out, that shows your lender that you’re responsible with your debts which, in turn, makes you a much lower risk for them.
Along with older credit cards, you definitely don’t want to pay off a car loan. Again, it would seem to make sense that if you get rid of other debt you’ll be in a better position to pay off your mortgage, but it actually has a bad effect on your credit score because it significantly alters your payment history. Your score can actually drop several points from a move like this, which might prevent you from qualifying for that mortgage altogether.
Applying for a mortgage can seem like a complicated business, but just try to educate yourself, know what you’re getting into and plan ahead.
Let us know of any questions, comments or suggestions you have!
Here are some other Mortgage Missteps that you should be aware of: