Did you know that your credit report is pulled twice during the lending process? Once in the beginning during the pre-approval stage and again right before your closing. During this time period it is imperative that you don’t do anything that could impact your credit score or your loan. Here’s what to do and not do to protect your credit while you are in the process of purchasing or refinancing a home.
Don’t Apply For New Credit
Refrain from taking out any new credit cards within the three to four months before you apply for a mortgage or while in the process of securing a loan. When you apply for a new line of credit with a company or retailer they will run your credit report to make sure you qualify for their card. This can decrease your credit score, which can push you into a lesser credit score category. If you were already in the process of obtaining a new home loan, this change in credit will show up once your lender pulls another credit report before closing – which could cause delays during the process.
Don’t Close Any Credit Card Accounts
Seems like a good idea to close those old credit cards, right? Don’t! Well, at least don’t when you’re in the process of securing a loan. Closing credit cards can hurt your debt-to-credit utilization ratio, which is the debt you have incurred on your credit cards divided by the credit limit on all your accounts. This ratio makes up 30% of your credit score. Closing credit card accounts will not only lower your available credit, but will also reduce the average length of your credit history. These both factor into what mortgages and interest rates you qualify for.
Do Continue to Use Your Credit Cards
Continue to use your credit cards and make your monthly payments as you normally would. If you stop using your credit cards for an extended period of time, your card issuer may cancel your card. This affects the average length of your credit history, resulting in a lower credit score. Lenders like to see a healthy credit history of using and paying your credit card bills on time.
Don’t Make Big Purchases Using Credit
When purchasing a new home, you may be eager to buy new items to furnish your home. Wait until after your closing to make these big purchases! This new debt can change your qualifications for certain mortgages and interest rates. Lenders recommend that your credit card balances be 30% below their limit during the loan process.
Don’t Co-Sign On a Loan
Think twice before co-signing on a loan for any relative or friend. Co-signing on a loan is an added risk to your credit score. Although you are not the primary borrower, by co-signing you are responsible if the primary borrower defaults on the loan. This added risk will alter your debt-to-income ratio, which will also affect your credit score.
Do Call Your Loan Advisor
Your loan advisor is there to guide you throughout the lending process. If you have any questions regarding your credit or loan, ask your loan advisor for advice.