A lot of Americans dream of buying a home. However, the current market is incredibly competitive due to high prices and low listings. In a CNBC post, Zillow senior economist Jeff Tucker notes that last year, houses were bought hours after hitting the market at a price that’s well above asking. He expects that the trend will continue this year. With that in mind, homebuyers should remain alert and do everything they can to secure a home.
When taking out a mortgage, homebuyers should educate themselves on the requirements they need, as well as how they can get the best rates. Because credit score can affect mortgage rates, many house hunters wonder if a hard credit check can affect their capacity to buy a house.
What is a Hard Credit Check?
In order for a lender or financial institution to know how creditworthy an individual is they usually perform a hard credit check. This applies to credit like auto loans, credit card applications, and mortgages. The credit report comes from major credit bureaus like Experian, TransUnion, and Equifax. These organizations will produce an entire credit report, which can provide lenders with important information like payment history, current loans, and various lines of credit. It will also show other places where an individual might have applied for credit such as student loans and car loans.
When applying for a mortgage, hard credit checks can’t be escaped. An article on Upgrade Points comparing hard and soft credit inquiries outlines that hard credit checks can lower credit scores. In fact, credit inquiries make up 10% of the overall FICO score. The lower the credit score, the worse their mortgage rates are. Because of this, homebuyers must lessen the number of hard credit checks performed on them. One way to do this is to stop applying for new credit, which can also increase their debt-to-income ratio.
A post on US News also advises that homebuyers should reach out to lenders and request for prequalification before looking for a home. By doing this it can help them avoid wasting their time on homes that they’re not qualified for. This usually involves a short conversation with a lender or a soft inquiry that doesn’t negatively affect one’s credit score. In addition, a feature we did on ‘How to Avoid Being Cheated Out of Your Money When Buying a House’ also encourages homebuyers to get pre-approved for a mortgage so that they’ll know how much they can spend and prevent a seller from taking advantage of them.
How to Keep Your Credit Score Intact
Because a low credit score means worse mortgage rates and terms, homebuyers should be prudent in keeping theirs high. Thankfully, there are plenty of ways to maintain a high credit score. Here are some tips to keep in mind:
• Pay bills on time. Because payment activity can show up on a credit report, falling behind could negatively impact an individual’s credit score.
• Keep credit card utilization low. A high credit card balance to credit limit ratio can impact a credit score. Financial experts advise that the combined credit card balances should be below 30% of their credit limit in order to keep a good credit score.
• It pays to do soft credit checks. Unlike hard credit pulls, soft credit pulls don’t affect a credit score. By regularly checking their credit score, they can spot errors such as credit card fraud and identity theft that might create an unnecessary dent in their credit score
Buying a house is not an easy task. Before getting to own their dream house, they have to make sure that they’ve completely assessed their finances and have a credit score good enough to qualify for a good mortgage. Because hard credit checks can lower a credit score, individuals looking to buy a home should also limit the number of hard credit checks performed on their accounts every year.