Buying a home is one of the biggest investments any of us will make in our lifetimes. Because of that, it’s understandable that buying a home can make a pretty substantial impact on your credit, especially if you don’t do it the right way. Throughout the homebuying process and far into the experience of owning your home, you’ll notice changes to your credit score based on inquiries, your payment history, and more.
Before You Buy Your Home
Credit score is one of the most important factors we look at when you apply to get a mortgage loan with us. Even if you have less-than-ideal credit, you do still have options when it comes to buying a home. However, if you’re looking to improve your financial landscape before you buy a home, that could involve making some changes to your credit score. The most impactful way to improve your credit score is to pay off the debts you currently have. Paying down balances on credit cards, loans, and avoiding hard inquiries will help you keep your score as high as possible for when you decide to start the loan process.
During the Homebuying Process
Throughout the homebuying process, we assess a few different parts of your financial landscape, from your debt-to-income ratio to your work history to your credit. To get pre-approved for your loan amount, we need to do a hard pull of your credit report. For most situations, we’ll probably only pull your credit once. However, if we need to confirm information or if your loan process takes longer, we may need to make another hard inquiry. Hard inquiries have a light impact on your credit, so moving as quickly as possible after you get pre-approved will help protect you from multiple inquiries.
You can also start your process by getting pre-qualified, which is a way for us to get a snapshot of your financial landscape to give you an idea of how much home you can start shopping for. Whichever route you choose, moving quickly and making sure you don’t change your financial picture at any point throughout the homebuying process will help protect you from more inquiries on your credit report.
When You First Purchase Your Home
Closing day is when buying a home starts to make real changes to your credit. First, you’ll have a new credit account. This new account can have an impact because not only are you increasing your number of accounts, but you’re also increasing your diversity of accounts. This can have a positive impact on your score. However, this new account will come with a pretty hefty balance. This will affect your debt-to-income ratio, which will have a negative impact on your credit until you establish a consistent payment history.
In the Long Run
As you own your home and make consistent mortgage payments every month, you’ll start to reap the benefits of homeownership. In addition to establishing you as a reliable customer, paying down that debt little by little will help decrease your overall debt-to-income ratio. Not to mention, building equity in your home will set you up to make profit if you decide to sell your home later on. However, if you’re delinquent on payments, owning your home can have a negative impact on your credit. This can be even more detrimental if you end up in foreclosure. The most surefire way to prevent owning your home from hurting your credit in the long-term is to make sure you consistently make your payments on time. This is much more easily achieved by getting pre-qualified and making sure you only shop for homes within that budget.
Overall, owning a home can make a big impact to your credit. From having an asset that contributes to your overall wealth to making payments that work to improve your credit score, it’s a fantastic way to give you a financial boost. The key to being a successful homeowner is proper preparation so you can feel comfortable throughout the entire process. Ready to make the leap today? Contact an experienced lender at Flat Branch Home Loans to explore your options.
