If you are thinking of buying a house or condo, your credit score matters. A low score can:
- Cause you to be unable to get a conventional mortgage.
- Drive up the price of your mortgage, because you are a higher-risk borrower.
Sudden changes in your credit score, after you apply, can cause your mortgage to fail.
How do credit scores work?
Credit score criteria change, so that people are less able to game the system. Even so, there are consumer behaviors that they always look at.
- Payment history. Showing that you pay your bills on time counts as a positive.
- Current unpaid debt. Lenders want to see that you use credit, but they do not want to see that you owe a large percentage of your income to recurring debt.
- Length of credit history. The longer you use credit, and pay it back, the higher your score. This disadvantages younger borrowers. Young would-be buyers should get credit cards and small loans a year or more before they apply for a mortgage. Then they can demonstrate a credit history and a payment history.
- Percentage of available credit that you are using. When you apply for your mortgage, the lender will be looking at your income as it compares to all your revolving debt. So, if you pay most of your daily expenses with credit cards, you need to show an immaculate history of paying it off monthly. Ideally, you should use one-third to two-thirds of your available credit lines on a regular basis. Not more.
- Type of debt and when it started. Every time you apply for a credit card or loan, you get a ding on your credit score. It goes away after some (varying) number of months. Therefore, apply for any other credit well before you apply for a mortgage loan. You can get a pre-approval from several mortgage lenders at the same time; it will only ding your credit once.
Applications for additional credit. Consumer credit from stores creates a bigger ding on your credit than a general credit card. That ten percent discount that you get from taking out a TJ Maxx credit card may not be worth it.
Credit score mortgage nightmare: Your lender will check your credit score just before closing. If there is a big change (towards the negative), they can deny you your loan. What can cause this?
- You went on vacation, or got married, or bought furniture after your offer was accepted, but before closing. You spent $10,000 on credit cards in one month.
- You bought a new car, with the dealer’s zero percent interest loan, since you are moving to the suburbs.
- You applied for a store credit card to get a ten percent discount on all the curtains and towels you bought for your new house.