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Buying a home involves a mortgage application process, which can be lengthy and includes an extensive credit review. One small misstep — like applying for a new credit card — could complicate your homeownership plans.
Applying for a new credit card can be tempting, especially with all the enticing offers and rewards. However, if you’re planning to buy a house in the near future, it’s crucial to think twice before hitting that “apply” button. A new credit card can potentially hurt your mortgage chances in several ways.
How a New Credit Card Can Affect Your Mortgage Application
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Impact on Credit Score: Applying for a new credit card results in a hard inquiry being made on your credit report, which may cause your credit score to drop momentarily. This is due to the fact that each hard inquiry can lower your credit score by a few points and remains on your record for two years. Your ability to get the mortgage interest rate you want can be significantly impacted by even a slight decline in your credit score.
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Increased Debt: A new credit card can lead to increased debt, especially if you’re not careful about your spending habits. This can negatively impact your debt-to-income ratio (DTI), which is a key factor that lenders consider when evaluating your mortgage application. A high DTI indicates that you have a lot of debt relative to your income, making you a riskier borrower in the eyes of lenders.
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Shorter Credit History: A new credit card can shorten your average age of accounts which is another important factor in your credit score calculation. The average age of accounts refers to the average length of time that you’ve had open credit accounts. A shorter average age of accounts can make you appear less creditworthy to lenders.
Alternatives to Applying for a New Credit Card
Consider these options instead of applying for a new credit card, as they won’t affect your chances of getting a mortgage:
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Focus on Improving Your Credit Score: If your credit score is less than stellar, focus on improving it before applying for a mortgage. You can do this by paying down existing debt disputing any errors on your credit report, and keeping your credit utilization low.
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Use Existing Credit Cards Responsibly: If you already have credit cards, use them responsibly and pay your balances in full each month. This will help you maintain a good credit history and avoid incurring additional debt.
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If you don’t have any credit history or have bad credit, you might want to look into obtaining a secured credit card. A security deposit is necessary for a secured credit card and serves as collateral for the credit line. By using a secured credit card sensibly, you can increase your credit score and future mortgage eligibility prospects.
The Bottom Line
Applying for a new credit card before buying a house can be a risky move that can potentially hurt your mortgage chances. By focusing on improving your credit score, using existing credit cards responsibly, or considering a secured credit card, you can increase your chances of getting approved for a mortgage and securing a favorable interest rate. Remember, buying a house is a major financial decision, so it’s important to be strategic and avoid any unnecessary risks that could jeopardize your dream of homeownership.
A new credit card application could interfere with the process
The amount you can afford to borrow is determined by a complex set of formulas, according to Karrina Brown, an associate broker at RE/MAX Executives, a real estate services company in Northern Virginia. Your credit score plays a significant role in that computation, and submitting new credit applications could lower it.
Brown confirmed that prospective homebuyers should avoid new credit card applications. “Credit score would be one reason that you wouldn’t want to take the risk,” she says.
It helps to know a bit about the factors that affect your credit score. By raising your credit limit overall and lowering your credit utilization, a new card could improve your credit score. But it also can hurt, by lowering your overall age of accounts.
Applications can hurt your score, too, because each one can take a few points off your score. A lot of applications in a short time can add up to a lot of damage.
This should be of particular concern to credit card “churners. ” Churners frequently open and close new cards to take advantage of discounts or limited-time promotions. Even though the majority have excellent credit and might not face any mortgage rejections, their pastime might result in higher rates.
Publisher of the online mortgage information resource TheMortgageReports, Dan Green, stated that “churning cards could affect your scores by 100 points or more.” com, says. He estimates that could bump up the rate you get by as much as a percentage point.
While that may not seem like much, over the course of a 30-year loan, it can add up to significant expenses. According to Green, opening a store credit card may save you thousands of dollars today, but in the long run, it could cost you thousands. ”.
When you apply for a credit product that involves a hard inquiry on your credit, you may get an influx of marketing messages from lenders. This happens because credit bureaus sell marketing lists triggered by hard inquiries. But you can opt out, either permanently or for five years. Visit OptOutPreScreen, a service of credit bureaus Equifax, Experian, TransUnion and Innovis, or call 888-567-8688. The bureaus say your request will be effective within five days. Note that you may still receive marketing offers from lenders that use other sources. Opting out does not affect your credit score or your ability to apply for credit or insurance.
What mortgage lenders look for
It frequently surprises first-time homebuyers that getting approved for a mortgage is far more difficult than getting approved for other kinds of loans. Home loans are typically large, so they represent a big risk for the lender. To play it as safe as possible, banks do a lot of digging into borrowers’ finances. This usually includes:
- confirming your employment and income (you’ll probably need to send proof of both)
- A review of your assets.
- A detailed review of your credit reports.
- A check of your credit scores.
- A calculation of your debt-to-income ratio.
In order to have your mortgage application approved at a competitive rate, you must provide the best possible picture of your financial situation. A month or longer may pass between your initial application and the completion of all the paperwork, during which time you’ll also need to maintain your financial situation.
Buying A Home In 6 MONTHS? Here’s Your Gameplan
FAQ
Is it bad to open a credit card 6 months before buying a house?
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