How to Shop for a Mortgage Without Hurting Your Credit
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Sure, you've saved up for a down payment on a new house, but unless you take steps to protect your credit, you may have a hard time qualifying for a mortgage and buying the home of your dreams.
Here are tips to shop for a mortgage without hurting your credit, so that you can snag a low rate when you are ready to buy your new house.
1. Shop with purpose
Shop around for a mortgage with the best rates, but don’t let your search drag on. Your credit score typically allows a shopping timeframe when you are looking for a mortgage. That means multiple applications you make within a particular timeframe will be counted as a single hard inquiry on your credit for credit-scoring purposes. A hard pull on your credit can temporarily shave a few points off your score.
Depending on the type of credit score used by the lender, this shopping window may range from 14 days to 45 days. To stay on the safe side, keep your search focused and brief. Ideally, limit it to 14 days.
If you cannot stick to that timeline, don't panic. The effect of a hard inquiry will lessen with time and it is only a small part of what makes up your credit score.
2. Pull your credit reports and check for errors
Mistakes happen. And when they do, you don’t want to be the last person to know about them. Lenders look at specific aspects of your credit history and financial situation to qualify you for a mortgage, so it pays to know what's in your credit file before you apply.
You are entitled to receive free annual credit reports online from the three major credit bureaus, Equifax, Experian and TransUnion. Go through them line by line, checking for inaccuracies. If you come across an error, file a dispute with the relevant bureau as soon as possible. You can do this online, by phone or by mail.
3. Pay off your credit cards
If you're up to your ears in credit card debt, lenders will probably think twice before offering you a mortgage because both your credit utilization ratio and your debt-to-income ratio will be high. That's why it's a smart idea to start paying off those balances before sending in mortgage applications.
Make more than the minimum payments on your cards each month. Not only will this boost your credit and lower your overall debt load, but it will also save you money on interest and show potential lenders that you’re serious about repaying what you borrow.
4. Get pre-qualified
If possible, get pre-qualified for a mortgage before even shopping for a house. Pre-qualification doesn't involve a hard credit inquiry. It is a lender's estimate of how much house you can afford based on the financial information you provide.
Once you have narrowed down your home options and checked your own credit reports for errors, you can take the next step and get preapproved, which will affect your credit score.
5. Stop applying for new credit
If you’re moving into a new house, you may also be interested in getting a new car for your driveway and furniture to fill your rooms, but hold off on applying for new credit cards and auto loans until you’ve locked down that mortgage. You want your credit reports to look as clean as possible when you send in your application, and many new inquiries may raise red flags for lenders.
While delaying the credit card applications could be a good call, it's generally not a good idea to close all your paid-off cards at the same time. If you do this, your credit utilization ratio may go up and your credit history may appear shorter and less varied, which could also hurt your score. Instead, plan on keeping your accounts open, at least until your mortgage is approved.
6. Save aggressively
You’re focused on getting a mortgage now, but remember to protect your credit score after you've been approved. Once you make your down payment on your new house, your savings may take a hit and you may feel tempted to start relying on credit more heavily. In the short term, that may be OK, but making it a long-term habit could do some serious damage to your credit score.
If your savings account is dwindling, consider cutting back on expenses where you can and starting an emergency fund. This way, in case of an emergency, you won’t have to use your credit card as a crutch. By protecting your credit score, you'll also have an easier time applying for mortgages and other credit lines down the road.