Your Credit Score Could Affect More Than You Think When Buying a Home

Understanding your credit before you start shopping for a home can help you prepare, avoid costly mistakes, and build a better mortgage strategy.

When people start thinking about buying a home, they usually focus on two things: How much do I need for a down payment, and what will my monthly payment be?

But there is another piece of the homebuying puzzle that deserves attention long before you start looking at houses:

Your credit.

Your credit profile can affect whether you qualify for certain mortgage programs, the interest rate and pricing available to you, and, on conventional loans with less than 20% down, potentially the cost of private mortgage insurance.

That doesn't mean you need perfect credit to buy a home. Far from it.

What it does mean is that understanding your credit—and knowing what to do and what not to do before applying for a mortgage—can put you in a much better position when you're ready to buy.

And sometimes the best thing you can do is nothing at all until you have a plan.

What Actually Determines Your Credit Score?

A credit score isn't based on just one thing.

According to Experian, the primary factors used in a FICO® Score include:

• Payment history — 35%
• Amounts owed — 30%
• Length of credit history — 15%
• Credit mix — 10%
• New credit — 10%

Payment history carries the greatest weight, followed closely by the amount of debt you owe—including how much of your available revolving credit you're using. 

Let's look at what some of those factors can mean when you're preparing to buy a home.

Pay Your Bills on Time

This one sounds obvious, but it is worth emphasizing.

Payment history is the largest component of a FICO score. Experian notes that a payment reported 30 days late or more can significantly affect a credit score, and the impact can become more serious as the delinquency becomes more severe.

If you're planning to purchase a home, protecting your payment history should be a priority.

One simple way to help avoid an accidental late payment is to set up automatic minimum payments on your credit accounts. You can always pay additional amounts manually, but the automatic payment can provide a backup if a due date slips your mind.

Pay Attention to Your Credit Card Balances

One of the most important—and sometimes misunderstood—parts of your credit profile is credit utilization.

Credit utilization is simply the amount of revolving credit you're using compared with the amount available to you.

For example, if a credit card has a $10,000 limit and you have a $3,000 balance, you're using 30% of the available credit on that account.

Experian notes that people with the highest credit scores tend to have utilization below 10%, and that lower utilization is generally better. It also identifies keeping utilization below 30% as a broader guideline for avoiding a more substantial negative impact on credit scores. 

That makes credit-card balances especially important when you're several months away from purchasing a home.

If you have 60–90 days before you plan to begin the mortgage process, paying down revolving balances may help improve your utilization before your mortgage credit is pulled.

But once you're getting close to applying for a mortgage, there's another rule I recommend:

Don't start paying debts off randomly without first developing a mortgage strategy.

Don't Assume Paying Off Every Debt Is the Best Move

This sounds counterintuitive.

If you're preparing to buy a home, shouldn't you pay off as much debt as possible?

Not necessarily.

Suppose you have $5,000 available. You might decide to use all of it to pay off the remaining balance on an automobile loan.

But depending on how many payments remain, your loan program and your overall financial situation, eliminating that particular debt may not provide the greatest benefit for mortgage qualification.

Perhaps that $5,000 would be more useful reducing revolving credit-card balances. That could potentially improve your credit utilization while also reducing monthly obligations.

Or perhaps keeping some of the money available for the home purchase makes more sense.

There isn't one answer that works for everyone.

That's why I prefer to review the entire financial picture before recommending that a homebuyer pay off debt.

One important distinction: an automobile lease isn't treated the same way as a traditional automobile installment loan for mortgage qualification. This is another reason not to rely on a simple internet rule about which debts will or won't count.

Don't Open New Credit Before Buying a Home

The months before purchasing a home are generally not the time to finance a new car, open several credit cards, finance furniture or take on other unnecessary debt.

Applying for new credit can generate a hard inquiry, and the new account itself can change your credit profile. Experian identifies new credit as 10% of a FICO score and notes that hard inquiries can temporarily reduce a score. 

There's another issue that's just as important for a mortgage:

New debt can change your debt-to-income ratio.

That new $600 car payment doesn't just affect your credit. It becomes another monthly obligation that may affect how much mortgage you qualify for.

And this rule doesn't end when you're preapproved.

Avoid taking on new debt while you're shopping for a home and while your mortgage is being processed.

If you're considering making a significant financial change before closing, talk to your loan professional first.

Don't Automatically Close Credit Cards After Paying Them Down

This is another common mistake.

Someone pays off a credit card and thinks:

“Great. I don't need this anymore. I'll close it.”

But closing the account can reduce your available revolving credit and increase your utilization percentage. Experian specifically identifies this as one reason closing a credit-card account can negatively affect a credit score. 

Here's a simple example.

Suppose you have $10,000 in total credit limits and $2,000 in outstanding balances.

Your overall utilization is 20%.

Now suppose you close an unused card with a $5,000 limit.

You still owe $2,000, but now you have only $5,000 of available revolving credit.

Your utilization has increased to 40%.

Length of credit history also matters. Experian identifies it as 15% of a FICO score. 

So before closing an older credit account, especially when you're preparing to purchase a home, understand how that decision could affect your overall credit profile.

Be Smart About Hard Credit Inquiries

You don't need to be terrified of having your credit checked.

But you should be intentional about it.

If you're still several months away from purchasing and simply want to get an idea of where your credit stands, consumer resources can give you an indication of your credit profile without requiring a mortgage lender to immediately perform a hard credit inquiry.

Once you're serious about moving forward, a mortgage credit report allows us to see the information needed to evaluate your financing options and work toward a full preapproval.

And there is an important distinction when you're shopping for a mortgage.

Credit-scoring systems recognize that consumers may shop among mortgage lenders. Experian explains that multiple inquiries for the same type of installment loan within a concentrated shopping period may be grouped together for scoring purposes rather than necessarily being treated as completely separate events. 

So the goal isn't “Never let anyone pull your credit.”

The goal is “Don't create unnecessary inquiries and have a reason for the ones you authorize.”

What If You Don't Have Much Credit?

Having little or no traditional credit doesn't necessarily mean homeownership is out of reach.

But building credit specifically for a future mortgage deserves some planning.

There are several ways consumers may begin establishing a credit history. Experian discusses options including secured credit cards, becoming an authorized user on another person's account and credit-builder loans. 

There are also services that allow certain recurring payments—such as rent, utilities, cellphone bills and some other payments—to contribute information to particular consumer credit profiles.

But there is an important catch:

Not every lender uses every credit bureau, scoring model or type of alternative credit information.

Experian itself notes that not all lenders use Experian credit files and not all lenders use scores affected by Experian Boost. 

If buying a home is your goal, don't just focus on creating a higher number in a consumer credit app.

Build credit with the mortgage goal in mind.

Check Your Credit Reports for Errors

You should also review your credit reports periodically for information that doesn't belong to you or isn't being reported correctly.

That could include an account you don't recognize, an incorrectly reported late payment, an inaccurate balance or information related to identity theft.

Consumers have the right to dispute inaccurate information.

Experian recommends reviewing reports from the three national consumer credit bureaus—Experian, TransUnion and Equifax—and filing a dispute when information appears incorrect or potentially related to fraud or identity theft. 

But if you're getting ready to apply for a mortgage, timing matters.

Be Careful With Credit Disputes During the Mortgage Process

Filing a legitimate dispute doesn't itself lower your credit score. However, changes resulting from the dispute can affect the score.

Experian also recommends considering the timing of a dispute if you plan to apply for new credit soon and notes that disputes typically take less than 30 days to complete. 

If you find something inaccurate several months before buying a home, that's a good reason to address it early.

If you're already in the mortgage process, however, talk with your loan professional before making changes so we can understand how the dispute may affect the mortgage file and determine the appropriate way to proceed.

The important distinction is this:

Disputing genuinely inaccurate information is very different from indiscriminately disputing legitimate negative credit information in hopes of temporarily changing a score.

What Is a Rapid Rescore?

Here's something many homebuyers don't know exists.

Sometimes we pull a mortgage credit report and discover information that is outdated.

Perhaps you've recently paid down a credit card, but the old balance is still being reported. Or perhaps documented information needs to be corrected.

Waiting for the creditor's normal reporting cycle could take time.

In certain circumstances, a mortgage professional may be able to request a rapid rescore.

According to Xactus, a credit-reporting provider used by the mortgage industry, a rescore can be used for certain documented updates, including updating a balance or paid-in-full status, removing some information reported in error, removing authorized-user accounts or removing dispute comments. A rescore cannot be used simply to add a new tradeline. 

Xactus says its typical turnaround is approximately three to five business days, with faster rush options available in some situations. 

But this is important:

A rapid rescore is not credit repair, and it doesn't guarantee that your credit score will increase.

It is a tool that may allow verified, updated information to reach the credit bureaus more quickly during the mortgage process.

How Does Your Credit Affect Your Mortgage?

This is where all of this preparation starts to matter.

Your credit profile can affect your mortgage in several ways.

Qualification: Mortgage programs have different credit requirements. A lower score doesn't automatically mean you can't buy a home, but it may affect which programs are available.

Mortgage pricing: In general, stronger credit can provide access to more favorable mortgage pricing. That means two borrowers purchasing similarly priced homes with similar down payments could potentially receive different financing terms because their credit profiles are different.

Private mortgage insurance: On conventional financing with less than 20% down, credit can also affect the cost of private mortgage insurance. A stronger credit profile may mean a lower mortgage-insurance cost.

Purchasing power: Credit can indirectly affect purchasing power as well. If your financing costs and monthly obligations are higher, that can affect the home price that comfortably fits your budget.

This is why improving your credit isn't simply about chasing a higher number.

The objective is putting your entire financial profile in the best possible position for the mortgage you want.

Preparing to Buy? Start With a Plan

If you're six months or a year away from purchasing a home, that's actually a great time to start thinking about your credit.

Pay your bills on time. Keep revolving balances under control. Review your credit reports. Avoid unnecessary debt. And begin thinking about how the financial decisions you make today could affect your ability to purchase tomorrow.

But as you get closer to buying, don't assume every piece of generic credit advice applies to your situation.

Don't automatically pay off accounts.

Don't automatically close credit cards.

Don't open new accounts simply because someone says they'll improve your credit mix.

Don't indiscriminately dispute accounts.

And don't make major financial changes during the mortgage process without understanding how they could affect your financing.

Sometimes improving a homebuyer's position involves paying down debt.

Sometimes it involves leaving an account alone.

And sometimes the best first step is simply developing a plan.

You Don't Need Perfect Credit to Start the Conversation

One of the biggest mistakes a future homebuyer can make is assuming they need to fix everything before talking to a mortgage professional.

You don't.

If you're thinking about purchasing a home—whether that's three months from now or a year from now—we can look at where you are today and determine what, if anything, may help put you in a stronger position when you're ready.

You may discover that you have work to do.

You may discover that a few relatively small changes could help.

Or you may discover that you're closer to being ready than you thought.

The important thing is to know before you start shopping for a home—not after you've found one you love.

Ready to Start Planning?

You don't have to wait until you're ready to make an offer on a home to start the mortgage conversation.

If you're thinking about buying in the next few months—or even sometime next year—we can review where you are today, talk about your goals, and identify any steps that may help you prepare your credit and finances before you begin shopping.

The earlier we start planning, the more time we have to make thoughtful decisions instead of trying to make changes after you've already found the home you want.

Have questions about your credit or preparing to buy a home? Let's talk.

Robert “Rob” Clark
Home Loan Consultant
Firestone Financial Group

📞 209-227-7745
📞 559-476-9279
✉️ rbrtclark53@gmail.com
🌐 robertclarkloans.com

Robert Clark | NMLS #357788
Firestone Financial Group | NMLS #301522
CA DRE #01148307
Equal Housing Lender

This information is provided for educational purposes only and is not intended as credit-repair, legal, tax, or financial advice. Credit scores, underwriting requirements, loan program guidelines, interest rates, mortgage insurance costs, and qualification requirements vary by borrower, lender, loan program, and other factors. Credit-score changes cannot be guaranteed. Not all applicants will qualify.