Looking to buy a home or refinance your mortgage?
If you're concerned about how multiple credit checks can impact your credit rating when shopping for a mortgage, you're not alone. The fact is, there's a lot of conflicting information about pulling credit with different lenders. How do you separate fact from fiction?
The good news is, securing the best mortgage rate doesn't mean your credit has to take a hit. In this article, we'll clarify when credit checks affect your credit score and when they don’t. We'll also look at some ways you can improve your credit rating before buying a home or refinancing a mortgage.
Armed with the right information, you can make an informed choice and put yourself in the best financial position when applying for a loan.
Why your credit score matters
When it comes to getting a low mortgage rate, your credit score plays a big part.
For better or worse, lenders lean heavily on your credit and payment history when determining the kind of loan and interest rate you can get. Even a few blips in your credit file could negatively impact your ability to get a loan or secure a great mortgage rate.
In general, the better you’ve maintained your credit, the better the mortgage rate you’ll qualify for. Even one or two points less in interest could mean thousands of dollars saved when buying a home or refinancing your mortgage—so it pays to nurture your credit rating.
Will credit checks hurt my credit score?
Many people are concerned about hard credit checks (a hard check, or pull, happens when you actually apply for credit). While it might sound weighty, a single hard credit pull has a minimal impact on your overall credit score. You might lose a few points, but it’s not that big of a deal.
The much bigger issue is when several hard checks occur in a short time period. For example, if you apply for several credit cards (even if you’re just after some airline miles). These activities are noted in your credit file and could suggest to lenders you’re short on cash or about to go on a spending spree. In this case, too many hard checks could hurt your credit and ability to get a loan.
What about credit checks for home loans—are these treated the same way?
No. The major credit agencies (Equifax, Experian, and TransUnion) know there's a difference between applying for five credit cards versus applying for five home loans. They understand that you may be shopping around for the best mortgage rate (and not trying to buy five houses!).
To make life easier for home buyers, credit agencies have different rules for mortgage inquiries. If you apply for several loans within a specific time period, usually 14 to 45 days, they’re treated as a single inquiry. Each agency has its own timeframes and rules (some even lump credit card inquiries together with mortgages). It’s worth checking which rules apply.
So, if you’re in the market for a loan, don’t be afraid to shop around for the best mortgage rate. Not only is it a smart idea, but it could also save you thousands of dollars. As long as you do it within the timeframes set out by the credit agencies, it won’t hurt your credit.
How can I improve my credit before buying a home or refinancing my mortgage?
If you’re considering applying for a mortgage, there are a lot of things you can do to improve your credit score. Here are some things to consider 6 to 12 months before applying.
- Prioritize paying down existing debt. Not only does paying off debt feel great, but it can also give your credit rating a big boost. By paying off your credit cards and loans, it lowers your debt-to-credit ratio. This shows lenders you're good at managing credit and not overextending yourself. When applying for a home loan, your debt-to-credit ratio should never exceed 30% (which means you’re using 30% of your available credit).
- Do not take out any new debt. If you're tempted to apply for new credit before applying for a home loan, you may want to wait. Taking out more debt will increase your debt-to-income ratio, and if it’s too high (over 43%), this can be a serious red flag to lenders. Ideally, it should be 36% or less.
- Fix any errors in your credit file. There’s nothing worse the combing through your credit history and finding unwanted surprises. Be sure to read through your credit report periodically and correct any errors immediately. It can also be a good time to remove unnecessary card holders and keep an eye on any loans you may have co-signed.
You're entitled to one free credit report every year. In addition, many credit card companies offer complimentary credit monitoring, making it easy to keep tabs on your credit file. Checking your credit won't impact your credit score, but it will help safeguard your credit rating.
If you're ready to take the next steps towards getting a home loan, keep us in mind.
At Timios, our goal is to provide you with a fully transparent, empowered, and enjoyable experience from start to finish. Our simple, centralized approach provides you with custom support and 24/7 access to your files throughout the entire home-buying or refinancing process.
We also know that your budget is important. Our closing cost calculator provides guaranteed closing costs at the time of calculation, so you know exactly what your closing costs will be—even before applying for a loan.
Please visit our site to learn more about the home-buying process and how Timios can help.
With over 250,000 transactions and $40 billion in total closings, remaining true to our values has made Timios one of the fastest growing title and settlement services companies in America.