5 Things to Avoid Before Buying A Home
With low mortgage rates and a battered housing market, it's a ripe time to buy a home. Here are five credit score related things you should avoid doing before buying a home.
A lender doesn't set a loan's interest rate based on only your credit score, but it's one of the easiest things you can affect with your actions. Avoid these five things to help ensure you don't get a higher rate than you should.
1. Don't apply for any new credit. When you apply for new lines of credit, the lenders will do a hard inquiry on your credit history. Hard inquiries will cost you a few points on your credit score. It might be appealing to take advantage of hot new credit card promotions but it will hurt you in the long run.
2. Don't take on any new debt. New debt will increase your credit utilization, which will negatively impact your score. Lenders are very wary of borrowers with a large amount of consumer debt, so don't help them build a case for a higher interest rate by taking on debt and dinging your credit score.
3. Don't take advantage of any "same as cash" offers. Same as cash is code for a short term loan and new loans, as you know, are going to hurt your credit score. The same goes for 0% financing or 0% balance transfer offers. Any benefit you receive from a "6 months same as cash" offer is going to be negated by the higher interest rate you'll pay on your home because you lost a few points on your credit score.
4. Watch where you shop. It sounds absurd but where you shop can affect your credit. Last December, Consumerist wrote about Kevin Johnson, a business owner with a FICO score 764, who had his the limit on his AMEX Blue credit card slashed because of where he shopped. Here's a Good Morning America video story about it. If a card slashes your limit, your credit utilization will go up and your score will be hurt by it.
5. Pay any late fees or dues, no matter how insignificant. Owe your local library fifty cents because you kept the Great Gatsby a few days extra? Pay it off. Many small organizations, especially in these economic times, are turning to collection agencies. Take care of these small debts because one report can cost you thousands in the long run in higher interest payments.
Here's one thing you should do right now: If you haven't done so in the last year, go to Annualcreditreport.com and request your credit history from each of the three credit bureaus. Review your history and dispute any inaccuracies. Errors can take months to fix so you'll want to fix them well before you apply for a loan.
Was there a big credit-related no-no that I missed?
Jim writes about personal finance at Bargaineering.com.
(Photo: armydre2008)
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Comments:
So far I haven't had any issues with my Mortgage guy.
He sat us down and went over our financials and told us what everything will cost including est. utilities.
We went through 3 mortgage guys until we found somebody we were comfortable with.
BTW Rates are pretty much 5% right now for FHA loans even if your score is near perfect you're not getting lower (unless the rate goes down).
I think another thing you should have is find the right mortgage guy these are the people who will decide your future for the next however many years. You can always refinance but I doubt you'll find a lower APR in the near future.
I should be getting the house appraised sometime this coming work (order placed on Monday) and hopefully we get that huge book soon to fill out and sign my life away.
Are these rules valid when applying for a refinance?
-ESPECIALLY- do not do -any- of these while your new home purchase is in escrow, just waiting to close.
Seems like common sense, but you'd be surprised at how many people go buy a new car for the new driveway before the house has actually closed.
It can cancel the whole deal, since you've now changed your credit from when the mortgage company approved it, even if it didn't really mess with your score.
Wombatish is pretty spot on about making sure purchase is closed before you take on new debt. Wouldn't want any last mintue funky surprises to f' up the close.
A few years ago, our home purchase was in escrow when, upon attempting to open a DirecTv account, they let drop that someone had opened an account in my name and had run up a $1600 balance. I had to go through the whole ID theft routine in order to get it cleaned up.
Id didn't affect our loan or the purchase, but I still wasn't too pleased with DirecTv. And as such I never established service with them.
What time period are we talking about on these things? Like, don't do these things for six months? A year? Two years?
@porschegal: Actually, having zero balance on all your cards is not good either. So I've heard from many sources, anyway.
@TCama: TCama - Mainly just until the purchase is complete. I am a week away from closing on my house, and then I will need to open up a new line of credit to get a fridge, washer, and dryer. Both my realtor and my mortgage agent have been clear that any purchases like that should wait until after the closing date of the house to avoid threatening the mortgage.
@thetango: They are great rules to use for almost any huge purchase.
Although the house is yours, refinancing is buying the home again. I would stick to them.
@Skankingmike: We were locked into a 5.125%/30 year mortgage in November 2007- we took advantage of a state mortgage program (for those interested in NY, it's called SONYMA)
The deals are to be had if you are looking!
@Wombatish: I can completely vouch for this. We had two couples, about two weeks apart, who were about to close on their home and came and spent several thousands on new appliances and home theater equipment. A few days later, they returned everything because the new credit card they opened messed up their closing. Now I ask everyone, just in case.
@DreadPirate: I think TCama was asking what I was wondering: I'm not immediately purchasing a house, but would like to in a couple of years. Is it important to not open any new credit lines now, or is this more important if I was closer to purchasing a house?
@Wombatish: I bought a car between the sale agreement and the closing and didn't have any problems. Nothing about my closing changed. I'm curious why it makes a difference for some people and not for others?
@jdsmn: When you start seriously looking for a home, the first thing you should do is get a preapproval through a lender. You'll know a lot at this point - what you can really afford, what kind of closing costs you'll look at, and what rate you'll paying. Best of all, when you make offers on homes, you'll have a leg up because you have financing arranged (and you'll know how quickly your lender can close). You'd be surprised how many individuals think this is optional.
At this point, all of these rules are in effect. You are a cash-only consumer. Because the preapproval is just that - a preapproval. Your lender will run everything again just before you close - if anything freakish pops up, there goes your financing.
@thetango: Yes. You want your credit score to look as good as possible to get the best rate.
One thing to remember though, is that your old mortgage will hang around on your credit score for a few months after the new mortgage starts, so if you're planning on buying a car or something else that uses credit, your debt load will appear higher for a few months after the refi.
I have to watch where I shop? That's ridiculous. If that's how the system works, I'll pay cash at the bottom. Or rent and buy chinese stocks. who cares? I am sick of these agencies, they didn't help prevent the bubble with liars loans, they're not helping decent homebuyers now.
As far as that library tip -- if an entity never has your social security number, can they impact your credit score? My understanding was that they can not and that late fees from a library could be sent to collection, but can not appear on your credit report as they never extended you credit.
I'm with fredmertz and call BS on the library tip. First of all, a collection agency is not going to handle any debt unless there is a reasonable return on their investment. I don't know what the cutoff is, but it's definitely more than $.50.
More importantly, there is a limited subset of the people to whom one owes money that report information to the credit bureaus. These generally only include credit grantors (credit cards, mortgages, car loans). It generally does NOT include utilities, libraries, municipalities, etc) and (to my knowledge) does not include collection agencies.
One other thing to note: if a lien is filed against your property (e.g. for non-payment of taxes), that WILL impact your credit score.
@Wombatish: All so true - this happened to somebody and it worked out to my benefit.
The people who were going to buy the house I live in now went out and bought a Range Rover while the house was in escrow. The bank wound up pulling the loan the day before their closing.
I swooped in and got the house for 20% under asking.
Bad for them, great for me.
Getting a second credit card before purchasing a home is a good idea if you traditionally only have a single credit card.
If you happen to dispute a charge on your credit card, the credit card companies stop reporting status to the credit bureas. This can sometimes take more than 60 days while the dispute is being investigated.
If your only credit card is under dispute, you have no FICO score... not a bad score, NO score.
Good luck getting a mortgage without a score.
Get a second card and use it to buy any online items. That way, if you put your new card under dispute, you dont loose the long credit history with your primary card.
@SoFlaSnowMan: The famous example of a library that uses a collection agency is the Queens [NY] Public Library. [www.nytimes.com]
@SoFlaSnowMan: In my library system, you have to be over the the limit of $10.00 in fines for at least 90 day before they send you a pre-collection letter. IIRC, after another 30 days of non-payment, then it goes to the collection agency.
@SoFlaSnowMan: You and Fred can call BS on the library thing all you want, but my $45 fine was reported to a collection agency and while it is paid, it's still on my credit report and there's not a damned thing I can do about it.
My brother also had one when he was closing on his first house a few years ago. All that happened was the bank made him pay it before he could close, but it still affects your credit score.
@Andrew Brooks: The "watch where you shop" statement is about credit card issuers dropping your available credit based on where you use the card, not related to the credit agencies directly.
Equifax doesn't know you used your AMEX at Wal-Mart, but AMEX does, and might decide to cut your credit limit from $30K to $300 because they figure you've suddenly started to shop down-market and that makes you more of a risk to AMEX.
And when AMEX lowers your available credit, that does get reported to the agencies -- but not why.
Life is too short for this. Really. I might feel differently if I were trying to squeeze the last dollar when buying a house I can't really afford, but I'm not going to do that.
I'm a happy renter and I'm likely to buy when the cost of a house is less than my rent - the cost including whatever wonky credit score they assign me. Which looks like it could be in the next six months or year.
People will avoid all these things and the credit card companies will come up with more reasons to lower credit scores.
"4. What where you shop."
Best advice I've gotten all week.
@theysaidwhat: You probably either a. got lucky and it just didn't matter for whatever reason, or b. Your bank/title company are not the best and somehow didn't find out/bother to check.
It's the title company's job to ensure a clean title, and if the parties start changing things that could affect the title, they will usually go with "Better safe than sorry" and cancel the closing until they can get it all sorted out, even if they end up just starting the process over again after it is all sorted out.
@Wombatish: Thanks! I think I may have been OK because I had no other debt at the time, as my prior house had already been sold, and the fairly small loan I had for the car didn't mess me up. It was a few years ago, so I can't recall if I had told the mortgage company (who also owned the title company) that I was planning to buy it.
I understand your reasoning though. Taking on new debt/credit could influence a mortgage.
@MooseOfReason: Ah, beat me to it. I guess I'm still trying to decide if it's supposed to be declaratively interrogative or interrogatively declarative.
Geez... First thing to do is to find the lender's credit score rating. I'm sure you'll find it listed right on their homepage next to their rates and your consumer's rights. Next, find your Real Estate Broker's credit score rating, which of course will be listed in plain view on their homepage. Then of course you'll want to find the State's credit score, where the potential purchase will be taking place, as well as the States where the Lender's home office resides. Oh yes, don't forget, now as part owner of your Lending Institution, you do have the right to borrow money from the company who got your money to stay in business in the first phucking place...
Absolve the bank, then absolve the country. Credit Scores are a sales scam and that's all it is. If you have some money, or can make the payment and your agents want to make the sale, then they'll make it happen. If not, then move on. It's what the market will bear. This credit score crap has to stop. It's all lies and marketing. Oh, and if your loan is changed in any way, ever, then all bets are off, period. America needs a revolution, otherwise enjoy your indentured servitude.
What about buying something like a car? I know it will obviously play against what available credit I may have. I am assuming that if the bank was going to give me a 400k loan and I buy a 30k car then they will now only offer me a 370k loan. Or do purchases like a car work differently? What if I finance my car through the dealer rather than on a line of credit or through the bank? Whats the best way to facilitate a needed purchase such as a car (must have as per contract with work), and buying a house both within 6-8 months of each other?
Also, don't close any credit cards. You'll need all the credit you currently have, along with its history.
On any card/cards you do have, charge nominal amounts and pay them off immediately. It'll demonstrate responsible use of credit.
Finally - don't quit your job. Length of time at an employer matters when obtaining a loan.
These were all told to me last year when I purchased my first home and seemed to be right on.