When you are trying to buy a house, it is important to protect your credit. That means being extra careful to make all your payments on time and not opening any new credit accounts or loans during the mortgage qualification process. Another very important tip is to avoid making any large purchases on your existing credit card accounts.
This may not seem like a big deal. If you are already under contract on a home sale, what difference does it make if you go out and put $5,000 on your VISA for furniture you know you’ll need for your new place anyway? The answer is: a lot.
Your credit score is partly based on how much debt you have relative to your total credit lines. It is seen as a sign that the borrower is in financial trouble, probably not having enough reserves to pay for needed expenses. If you make a significant purchase on a credit card, especially if it maxes out your limit, your overall score can drop dramatically overnight. We’re not talking a few points; we’re talking 50 or more points.
If you are not trying to apply for other loans at the same time, then this does not create problems for you. As you make timely payments and reduce your debt load over the next few months, your credit score will begin to rise again. However, if you are in the middle of a mortgage underwriting process, this is bad news.
If your credit score was already excellent, that big of a drop could mean an increase in the mortgage interest rate you are offered, resulting in higher payments and a more expensive loan in the long run. And if your score was not great to begin with, a drop of 50 points or more could scare a lender away from working with you altogether. That means either scrambling to find another lender willing to work with you or it means pulling out of the home sale contract.
The safest course during the home buying process is to avoid any and all larges purchases until your mortgage closes. Since it only takes between 30 and 60 days, this is usually manageable for most buyers, unless there is an emergency.
If you absolutely must make a large purchase before you close on your mortgage, try spreading the amount out over several of your credit cards. This will minimize the damage to your credit by reducing your credit utilization rate on any single card.
And if you can, start lowering your credit card debt balances several months before you apply for a home loan. This will increase your score and position you for better rates and terms once you are ready to buy.
It is also a good idea to avoid major cash purchases during your underwriting period as well. This can deplete your assets. It might not make your credit score fall but lenders will notice. If you have fewer reserves for down payment, closing costs, and home maintenance, they may see you as a bigger lending risk.
So the bottom line here is this: try not to touch your credit cards (or cash) during the mortgage application process. It will save you a lot of trouble and money.
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