How Credit Affects the Home Buying Process

Does credit affect my mortgage rates? Will getting a mortgage affect my credit score? How do you build credit? Get your answers to all of these questions and learn how credit affects the home buying process with this helpful guide.


Understanding Credit & Mortgage Rates

If you want a better mortgage rate, you’re going to need better credit, that is a pretty well established fact. But don’t worry—that doesn’t mean you can’t afford to buy a home with just okay credit. You can! While you will have more competitive mortgage rates with stronger credit, there are programs that can help buyers improve their credit and offerings that are specifically designed for people with “just okay” credit.


To get the best rate on a home loan, you need a credit score of about 740 or higher. For every drop in the range of 660-699, a home loan interest rate goes up by roughly 0.2 percent. For a score below 660, that rate increase is closer to.4 percent. While that may not seem like huge increases, remember, that interest is adding up over the course of 15-30 years and can significantly change the overall cost of your loan.

How Does Credit Affect the Home Buying Process?

How else does good credit affect the home buying process? Having better credit could also open you up to more loan options. The two most popular types of home loans are conventional loans or an FHA. An FHA-insured loan is a US Federal Housing Administration mortgage insurance-backed mortgage loan that is provided by an FHA-approved lender. This type of loan is easier to get if you are still building your credit. However, it doesn’t offer as good of rates as a conventional loan. In addition, you will have to pay a monthly amount of mortgage insurance for the duration of the loan.

A conventional loan on the other hand is not backed by a government agency and is originated and serviced by private lends like banks or credit unions, which may also offer FHA loans. Unlike an FHA, conventional loans may require you to exhibit a higher credit score, and may have higher down payment requirements.


Whether you opt for a conventional vs FHA loan, in either case, better credit will open you to better rates.


Will Getting a Mortgage Affect My Credit Score?


There are a few ways that a mortgage affects your credit score. In the short term, if you plan on taking out a home loan, you will eventually have to do a hard credit check run (you start with a soft credit check, which doesn’t impact your score). But anytime a hard check is run (this happens when you apply for a new credit card or buy a new car), your credit will take a small dip for a short period of time.


It takes a few months for a hard credit check to clear, so it’s best not to do anything else that impacts your credit score when you are trying to apply for a home loan. The good news? Your credit score is only impacted once during the home buying process. This occurs after the first mortgage lender runs your credit. But you have a 45-day window after, during which other mortgage lenders can also run your credit without it impacting your score. That means you can shop around for the best rate and research new home mortgage lenders—which is something that you should definitely do.


Over the long-term though, a mortgage can actually help you improve your credit score. As long as you make regular, on-time payments—a mortgage is a great way to build up your credit by showing off your creditworthiness over a long period of time.


How to Build Credit

To build credit, you need to prove to lenders that you are capable of taking on debt and paying it back over time. In some cases, that means that putting a large purchase on your card and then paying it off all at once won’t improve your score as well as making a large purchase on your card and paying it off over 12-months.


That said, you should still strive to pay your credit cards off every month. If you use your credit card regularly, consider making more than one payment per month. This way, you charge your card up and then pay it down—this is proof of regular, on-time payments over a longer period of time.


Debt-to-Credit Ratio

Your debt-to-credit ratio is also important. You want to have as much available credit as possible. To increase this, you can try asking for a credit limit increase on your credit cards. Lenders often offer this option online as long as you provide a little more information about yourself and your income. Just remember that you aren’t increasing your limit to spend more. Simply to increase the gap between how much credit you have compared to how much debt you owe.


Credit cards are not the only way to improve your credit though, and often—they can be both risky, and expensive if you end up with high balances that carry large interest rates.


Other loans, like college loans that have low-interest rates, can sometimes be considered as “good debt.” Paying them off regularly and on time can help you build credit and prepare you for the home buying process. Paying car loans regularly and on time can also improve your credit, but these types of loans are typically seen as “bad debt.”


It’s good to understand how credit affects the home buying process, and how getting a mortgage will affect your credit score—especially if you’re a first-time homebuyer. Because learning how to build credit before you enter the home buying process, and taking time to understand the relationship between credit and mortgage rates, will help prepare you for buying your dream home.



Contributed to Your Home blog

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Published 11.23.2021

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