Buying a home is every American’s dream, as it is the picture of ultimate financial stability. It is also a significant milestone that should be celebrated, as it takes a desirable financial position to afford such a big-ticket purchase. Due to this, buying something as expensive as a property will significantly impact your credit, especially if you don’t go about the process the right way.
Undergoing the home buying process will naturally change your credit score based on the inquiries you make, your payment history, and other actions. It’s essential to keep your score as high as possible, mainly when applying for a mortgage in Colorado Springs. Here’s what you need to know about buying a home and how it impacts your credit:
The Importance of Your Credit Score
Your credit score is one of the most vital factors that lenders consider when reviewing your mortgage application. If you have a lower credit score than what they prefer, you can still explore other options in purchasing a home, although these typically come with higher interest rates to offset the risk of you defaulting on your payments.
Still, if you’re hoping to improve your financial position before buying a home, you’ll have to find ways to increase your credit score. The most reliable way to do this is to pay your current debts, such as repaying balances on your credit cards, loans and steering clear from hard inquiries. Doing these will boost your credit score, which will immensely help you when you start applying for a mortgage.
Your Credit Score and the Homebuying Process
Mortgage lenders assess various parts of your financial position during the home buying process, including your work history, credit, and debt-to-income ratio. We also do a hard pull of your credit report if you seek pre-approval for your loan amount. Typically, we pull your credit only once, but we may have to make a second hard inquiry if we need to confirm information or if the loan process takes longer than expected. These inquiries lightly impact your credit, which is why it is crucial to act as quickly as possible once you get pre-approved to protect you from several inquiries.
You can also begin the home buying process by getting pre-qualified for your mortgage, which gives lenders a snapshot of your position. We’ll then give you an estimate of how much of a home you can start shopping around for a potential property. Keeping your financial picture intact and moving quickly throughout the home buying process will do wonders for protecting you from more inquiries on your credit.
Purchasing Your First Home
Once you reach the closing day, buying a home will start affecting your credit significantly. You’ll have a new credit account, which will impact your credit because you’ll be increasing your number and diversity of accounts. Fortunately, this can positively affect your score. However, the new account will come with an enormous balance, impacting your debt-to-income ratio, which will negatively affect your credit unless you repay your mortgage consistently.
Making Consistent Mortgage Payments
Once you start paying your mortgage every month, you’ll start enjoying the advantages of home ownership. You’ll become a reliable customer, and paying your debt consistently will slowly decrease your debt-to-income ratio. You’ll also begin building equity in your home, which is guaranteed to make you some profit if you decide to sell your home at some point.
However, if you fall behind on payments, owning a home will adversely affect your credit. To make sure your home doesn’t hurt your credit in the long term, be sure to pay your mortgage on time, which is more easily achievable by getting pre-qualified and shopping for homes within your budget.
Home ownership is a significant milestone worth celebrating. However, to make sure it helps you instead of adding more stress and burden, knowing how buying a home affects your credit is essential. That way, you can determine your readiness to purchase a home and start looking for a mortgage to help you fund your ideal property.
Total Lending Concepts is a mortgage lender in Colorado Springs with others in Missouri, Texas, and Florida. We offer home loans that fit every situation, whether you’re a first-time home buyer or you’re ready to buy the home you’ve long saved up for, through our wide variety of loan options such as conventional, VA, USDA, FHA, and more. Contact us today to get started!