December 10th, 2014 8:43 AM by Jackie A. Graves, President
Obtaining a home loan can have a variety of consequences for your credit
score, and your credit score can
have a variety of consequences on your mortgage.
Here’s what you need to know about credit when shopping for a home.
The Effect of Mortgage Applications and
When you apply for a loan or for a line of credit, your credit score
usually takes a small hit. Luckily, you don’t have to be too worried about
dinging your credit score when you go loan shopping.
Normally, multiple credit inquiries would indicate a problem with your
credit or that you have a problem with debt. However, loans such as mortgage
and auto loans have a grace period during which multiple inquiries are treated
as a single inquiry, so you don’t have to worry about your credit taking a
While your lender will probably pull your FICO score, which has a 30-day
grace period, they may instead pull your VantageScore—which
only has a 14-day grace period.
To be on the safe side, do all of your loan shopping within seven to
What Mortgage Lenders Look for in Credit
Lenders are looking for good credit scores and the absence of bad credit
marks, such as these:
Defaults in payment
Payment history is the greatest factor in your FICO credit score,
accounting for 35% of the score. The other FICO credit factors are amounts owed
(30%), length of credit (15%), new credit (10%) and types of credit (10%).
Loan Balances and Debt-to-Income Ratios
The balance of your home loan influences your credit positively as the
loan decreases. Your credit score gets better as the gap between your original
loan and current balance diminishes.
Your debt-to-income ratio compares all your debts, loans and credit
cards to your total income. A high debt-to-income ratio could result in the
denial of a loan. A low debt-to-income ratio shows lenders you have a better
ability to repay the loan and is preferred by lenders.
Some loans, like qualified mortgages, require the borrower to have less than a
43% debt-to-income ratio to be eligible as a borrower.
Managing Your Credit Score
Getting and maintaining a good credit score may not be easy, but there
are steps you can take to keep a healthy score:
Offer a higher down payment so you
are borrowing less money.
Do not apply for any new loans or lines of
credit during the home-buying process.
Lower your debt-to-income ratio by paying off
as much debt as possible before applying for more credit or a mortgage.
Make all payments on time.
Sometimes credit reports may misreport negative events—like late
payments, lawsuits, liens, bankruptcies, repossessions and foreclosures—so
monitor your credit report every few months. Dispute any claims that don’t look
By law, you are granted one free credit report from each of the three
credit agencies (Equifax, TransUnion, Experian) every year. Go to annualcreditreport.com to get yours.
By: Craig Donofrio | Updated from an earlier version by Frank Alan
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