What You Need to Know About Mortgages and Your Credit
What You'll Learn: How credit score affects rates, hard vs. soft inquiries, 45-day shopping window
EXPECTED READ TIME: 7 MINUTES
Whether you’re a first-time homebuyer or considering refinancing your current mortgage, it’s common to have questions about credit. Does your credit score affect your mortgage rate? Does applying for a home loan hurt your credit? How many inquiries is too much? From loan application to loan closing, here’s what you need to know about credit.
How much does credit score affect your mortgage rate?
Your credit score holds important weight in a mortgage approval and interest rate because it’s directly tied to your credit history. In simplest terms, if you’ve made on-time debt payments in the past, it’s a good indication you’ll make future mortgage payments.
That said, your credit impacts many aspects of your mortgage. Your down payment amount, debt-to-income ratio (DTI), loan type and term, and points are some of the many other factors that can affect your rate.
What credit score is needed to get a mortgage?
More than one credit score is considered, so the actual scores you need depend on the scoring model your lender uses. For instance, many lenders use 620 credit scores in most cases when reviewing your application and considering mortgage approval. It’s also important to have a thorough understanding of your credit history, which appears on your credit reports.
Various options are offered for mortgages, including conventional fixed-rate mortgages, VA home loans, and jumbo home loans. There’s no magic number when it comes to the credit score needed for mortgage approval, but generally, a lower amount of credit card utilization and lower amounts of credit card debt may potentially help when you apply for a mortgage.
Can you buy a house with a low credit score?
Your lender wants to ensure you'll be able to make payments on the loan you're extended. If you have a lower credit score, you'll likely be considered at a higher risk for defaulting on payments.
Lower scores can result in paying higher interest rates, which can cost you thousands of dollars over the life of a loan or could cause your application to be declined altogether.
Most negative items may not come off your credit report for up to seven years, so late payments, defaults, and accounts closed for nonpayment can all negatively impact your likelihood for loan approval. Making positive changes to your credit before applying for a mortgage can be extremely beneficial.
Can you buy a house with credit card debt?
If you have credit card debt, the first thing you should know is you’re not alone. Nearly half of credit card holders carry debt from month to month. While it won’t necessarily prohibit you from homebuying, it may have a negative impact on your credit score.
To set yourself up for success, consider reducing credit card spending and pay down your balances as much as possible. Lower balances will lead to a better credit score.
How do you get your credit ready before applying for a mortgage?
You can check your credit reports for free once per year to ensure everything is in good shape before applying for a mortgage. It helps to prepare as early as possible to allow yourself time to make positive changes and for your actions to take effect. Remember: The better your score, the better rates and terms you will receive.
Here are some ways to improve your credit score and show a potential lender you can reliably pay back a mortgage:
- Make debt payments on time
- Lower your credit card balances
- Avoid applying for new credit
In addition to impacting your credit scores, new debts affect your debt-to-income ratio (DTI) which is an important factor in loan approval and interest rates. So, it is wise not to apply for anything when you are in the homebuying process.
How long does it take for credit card payments to appear on a credit report?
According to Experian, most lenders update your account information once per month, so you should allow 30 to 45 days for credit card payments to show on your credit reports. Again, the more time you give yourself to pay down credit card debt, the more time you’ll have for your positive actions to help show that you’re a responsible borrower.
What should you do if you don't recognize something on your credit report?
If inaccurate or fraudulent information is on your credit report, you may want to dispute the information before beginning the mortgage process to help avoid bringing down your credit score unnecessarily.
You can dispute a charge by reaching out to the creditor or lender listed and also by contacting the major credit bureaus, Equifax, Experian, and Transunion. You may need to provide documentation for the dispute, and there will be a process to get it corrected. Appropriately listed negative information can't initially be removed from your credit report, but may be taken off after seven years.
What is the difference between a hard and soft inquiry?
A hard inquiry, or hard credit pull, happens when a financial institution checks your report to make a lending decision. These are common when you apply for a:
- Mortgage
- Student loan
- Credit card
- Auto loan
A hard credit pull can impact your credit score, lowering it temporarily by up to five points. Too many inquiries can have a significant impact because it tells a lender you are actively seeking more credit. It’s less of a concern if the pulls are happening within a short window of time (14 to 45 days) and they are for the same type of loan (mortgage, auto, etc.).
A soft inquiry happens when there is a credit check for personal use like MyFico.com or part of a background check. Mortgage pre-qualification is typically a soft inquiry and has no adverse effect on your credit score.
What is the 45-day shopping window for mortgages?
The 45-day mortgage credit pull is a rule of thumb to serve as a guide as you start shopping for mortgages. It comes from the credit scoring models lenders use, typically either FICO or VantageScore. FICO offers a 45-day window for multiple hard credit inquiries of the same type to count as a single inquiry. Vantage 3.0 offers 14 days. Unless you are certain your lender is using FICO, it may be best to be conservative and keep the hard inquiries within two weeks of each other.
How many times will lenders check your credit for a mortgage?
The number of hard credit pulls for a mortgage can vary depending on your lender and the loan you’re applying for. It’s common to have three hard inquiries throughout the mortgage process:
- Pre-approval – Before making an offer on a home, you will want to be pre-approved for the loan. A pre-approval is an involved process where lenders verify your financial information including credit history.
- During the application process – Depending on the lender and underwriter, a second hard pull is made if your pre-approval expires. A pre-approval letter is usually valid for 90 to 120 days. If you haven’t locked in your interest rate yet, this second pull can result in a higher score and lower rate if you have paid off debts.
- Before closing – A lot of time can pass before closing, and lenders want to confirm nothing significant has changed with your credit before final approval. They will check if there are new credit inquiries and increased credit lines, such as a new credit card.
We get it: There’s a lot to understand when it comes to credit and it’s just one aspect of the homebuying process. Here are some key takeaways to set yourself up for success:
- Check your credit report well before applying for a mortgage
- Take strides to improve your credit score
- Shop for mortgage quotes within a 14- to 45-day window