Spring has sprung, and that means the traditional home-buying season is right around the corner. There’s no better time for first-time homebuyers to start thinking about budgeting to buy a home than right now. That’s why we pulled together a few smart tips to help you prepare. So read on (and come back next week, as we’ll have a handful more).
Let’s get started!
Don’t mess with your credit.
Are you thinking of buying a home? Don’t open new credit — even a car loan or a store credit card — if you’re applying for a mortgage anytime soon. Don’t even do it after you’ve been pre-approved.
Why? Your credit rating gets pinged with every new credit application you make, even if you never use that line of credit! Lenders check your credit history at pre-approval, but they recheck it just before closing. If your credit rating drops, your mortgage pre-approval could be denied.
Our advice is to wait until after you’ve closed on your home before taking out any new credit like a car loan or a new credit card.
Don’t make major purchases.
Running up expenses is sure to ding your credit score, so try to keep your credit clean as a whistle until you close on your new home. If possible, use cash, especially if purchases are small and you’re not tapping into your down payments or closing costs savings. Better yet, delay buying that new car, sectional sofa or new iPhone until after closing on your mortgage.
Besides, you’re going to want to see how well you can handle the costs that come with new homeownership for a while. We suggest staying the course and getting through a few months of mortgage payments before allowing other large purchases to stretch your budget.
Don’t close or max out credit cards.
It’s also important not to pay off a loan or credit card account before closing on your home. The length of time you have credit in good standing is a key factor used to calculate your credit score, and if you close an account, all that credit history is wiped from your report. That can lower your credit score and increase your DTI — aka your debt-to-income ratio.
Additionally, credit scores depend on credit utilization — the percentage of available credit you’re currently using. A good benchmark is to maintain a high credit limit but use less than 30%. Closing an account will immediately make your credit utilization go up.
So our tip is to keep existing accounts open and active and don’t close them until after closing. Sometimes that might mean paying an annual fee — which you might think is a waste of money — but it’ll be worth it if the higher credit score gets you a lower interest rate over the life of your loan.
Don’t consolidate debt to fewer cards.
When it comes to buying a home, debt consolidation has pros and cons, depending on timing. If you decide to consolidate debt just before going house hunting or during the mortgage process, don’t be surprised if you see a short-term drop in your credit score. That’s because of the hard credit inquiry that takes place every time you apply for a loan or line of credit. And it doesn’t matter if it’s a local supermarket credit card or a big cash loan: it’s an equal hit.
Debt consolidation can also hurt your credit rating by increasing your overall debt load. That’s due to potential loan origination fees or credit balance transfer fees. Luckily, these bumps are only temporary, but you want to avoid them if at all possible. Lower credit scores could result in higher mortgage APRs than you might typically be offered if you didn’t consolidate. That could end up costing you thousands of dollars over time.
Don’t miss a payment on existing debt or bills.
We’re sure you know that missing a payment on any bill is a no-no. But most companies have a grace period of a day or two. If you miss your credit card or utility payment by just a few days, the chances are good that you won’t be charged a late fee, or there won’t be a ding against your credit report.
It pays to err on the side of caution. Rule #1: Pay on time. And if you can’t pay on time, pay late. Don’t skip a payment, ever. It’s best to pay a bill in full, but if you can’t, consider paying at least the minimum amount due. Creditors typically don’t report late payments to credit bureaus like Experian or Equifax until the payment is at least 30 days past due. That’s not a guarantee, though, as every issuer is different.
Additionally, you should always check your monthly bills. If you are charged a late fee, we suggest paying it off and — if the lateness is not a common occurrence — call customer service and request it be forgiven. Most issuers will overlook an innocent mistake.
But do this!
Now that you know some of the things you shouldn’t do before applying for a mortgage, here’s one you SHOULD do: speak with a mortgage professional in your area who can look at your unique situation and tailor a mortgage that’s right for you.
If you’re already feeling you’ve got this, great. Apply online with the Movement Mortgage Easy App. This tool will help you get pre-approved quickly by letting you upload all required documents straight into the app.
Next week’s blog post will have four more pre-mortgage things to watch out for, so stay tuned.