When you’re in the process of buying a home, one of the most important factors that lenders take into consideration is your credit score. Credit plays a major role in the approval process and can be the difference between a successful loan approval and a rejected application. Knowing how to best manage your credit during the home purchasing process can help you get the loan you need to make your dream of home ownership a reality.

Credit Score 

Your credit score plays a significant role in the homebuying process. Here’s how it can affect both your approval and your interest rate. 

1. Approval:
Your credit score and credit history are one of the primary factors that lenders consider when determining whether to approve your mortgage application. Lenders want to ensure that you're a low-risk borrower, and your credit score and history helps them assess this.
2. Interest rate:
Your credit score can also affect the interest rate you're offered on your mortgage. Generally, the higher your credit score, the lower your interest rate will be. 

Different Types of Credit 

When it comes to the homebuying process, lenders will look at different types of credit to determine your approval for a mortgage. Here are some ways different types of credit may affect your approval:

1. Mortgage lates:
If you have late payments on your current or past mortgages, this can be a red flag for lenders. Late payments on a mortgage can indicate that you're not able to manage your debts responsibly, which can lower your credit score and make it harder to qualify for a new mortgage. Additionally, if you have a history of missed payments on your mortgage, lenders may consider you a higher risk borrower and may offer you less favorable loan terms.
2. Credit card lates:
Late payments on credit cards can also affect your approval for a mortgage, but the impact may not be as severe as with mortgage lates. Credit card lates can lower your credit score, which can make it more difficult to qualify for a mortgage with a low interest rate. However, lenders may be more forgiving of credit card lates than mortgage lates since credit card debts are typically unsecured, and the credit card lender doesn't have a lien on your property.
3. Auto loan lates:
Late payments on auto loans can also impact your mortgage approval, but like credit card lates, the impact may not be as severe as with mortgage lates. Auto loans are typically secured debts, meaning the auto lender has a lien on the vehicle you purchased with the loan. As a result, the lender may be less concerned about late payments on an auto loan than they would be about late payments on a mortgage.

Elements of a Credit Score 

There are several elements that make up a credit score, including payment history, credit utilization, length of credit history, types of credit, and recent credit inquiries. Here's a breakdown of each element and what you can do to bring your credit score up:

1. Payment history:
Payment history is the most significant factor in determining your credit score. It accounts for 35% of your credit score, and it reflects whether you make payments on time or have missed payments in the past. To bring your credit score up, make sure to pay all your bills on time, even if it's just the minimum payment. 
2. Credit utilization:
Credit utilization refers to the amount of credit you're using compared to your total credit limit. It accounts for 30% of your credit score, and it can impact your credit score positively or negatively. To bring your credit score up, keep your credit utilization low, ideally below 30% of your credit limit. 
3. Length of credit history:
The length of credit history accounts for 15% of your credit score, and it reflects how long you've had credit accounts open. To bring your credit score up, keep your credit accounts open for a long time, and avoid opening new accounts frequently. 
3. Types of credit:
Types of credit account for 10% of your credit score, and it reflects the different types of credit you have, such as credit cards, loans, and mortgages. Having a mix of credit types can help increase your credit score. To bring your credit score up, diversify the types of credit you have. 
4. Recent credit inquiries:
Recent credit inquiries account for 10% of your credit score, and it reflects how many times you've applied for credit recently. Too many credit inquiries can signal to lenders that you're a risky borrower, which can hurt your credit score. To bring your credit score up, limit the number of times you apply for credit. 

How Purchasing During Loan Application Process Affects Credit Score  

It's essential not to purchase anything that would increase your debt during the loan application process, as it can potentially lower your credit score and affect your ability to qualify for a loan. Here are a few reasons why:

1. Increased debt-to-income ratio:
If you purchase something during the loan application process that increases your debt, it can potentially increase your debt-to-income (DTI) ratio. DTI ratio is a measure of your monthly debt payments relative to your monthly income. Lenders use this ratio to determine your ability to make payments on a new loan. If your DTI ratio is too high, it may signal to lenders that you're not able to manage your debts responsibly, and they may be less likely to approve your loan application.
2. Lower credit score:
Purchasing something that increases your debt can also potentially lower your credit score. Your credit score is based on several factors, including payment history, credit utilization, length of credit history, types of credit, and recent credit inquiries. If you purchase something during the loan application process that increases your debt, it can affect your credit utilization ratio, which can lower your credit score. Additionally, if you miss payments on the new debt, it can further lower your credit score.
3. Loan approval:
Finally, purchasing something that increases your debt during the loan application process can potentially affect your loan approval. Lenders typically review your credit and financial history to determine your eligibility for a loan. If your credit score or DTI ratio changes significantly during the loan application process, it can impact your loan approval.

Your credit is a crucial factor in the homebuying process. It can affect both your approval and the interest rate you're offered on your mortgage. Therefore, it's essential to maintain good credit habits, such as paying your bills on time, keeping your credit card balances low, and monitoring your credit report regularly, to ensure you're in the best possible position to secure a mortgage with favorable terms.

Sirva Mortgage can help you navigate the intricacies of the mortgage landscape with confidence. We encourage you to reach out to us, explore your options, and take the first step towards realizing your homeownership goals. Together, we can find the right strategy for your financial future in the housing market.