You put a bid down on your dream home and it was accepted! Congratulations! Now you need to get yourself to the loan closing. If you already received a preapproval for your financing, you are halfway there. Remember, though, you still have to verify everything you stated in your contract. You also have to be very careful about what you do with your credit between now and the loan closing. There are many credit mistakes people make that ends up costing them their dream home in the end.
Closing your Credit Card Accounts
It makes sense – the less available credit you have, the less risk you pose to a lender, right? In some cases, this is wrong! If you close your credit card accounts, even voluntarily, it can negatively affect your credit score. This might not be a big deal to you after you close on your home, but prior to that date, leave those credit card accounts open. Most lenders pull your credit one more time right before you close on your home. This is in an effort to determine if you took out any loans between your loan approval and closing. It is also a way to see if you made any poor financial decisions in that time. Rather than closing out unused credit card accounts, just leave them. You don’t have to use them, but leave them open.
Opening New Credit Card Accounts
Doing the exact opposite of closing credit card accounts can also hurt your home purchase. If you apply for new credit between the time you receive loan approval and you close on your loan, the lender has to go back to the drawing board. New credit means a new debt ratio and higher risk. The lender has to figure out if you still qualify for the loan. As tempting as it may be to apply for new credit to furnish your home or decorate it, wait until you own the home to start applying.
Using Existing Credit Cards
Believe it or not, using your existing credit cards can even hamper your ability to close on your home purchase. Using your credit cards does two things:
- Increases your debt ratio if your minimum payment increases
- Decreases your credit score if your credit utilization rate increases (the optimal rate is 20-30%)
If you need to charge something, don’t buy it. You can wait until after you purchase your home to make the purchase. This helps to protect your credit score and your debt ratio. The more you charge, the higher your credit utilization rate gets and the lower your credit score. If your minimum payment increases, the lender has to go back and figure out if your debt ratio still meets the required guidelines for the program as well.
Paying Off Old Debt is Among the Credit Mistakes
It might seem strange that you should not pay off old debt while you wait to close on your home loan, but it affects your credit. If the lender approved your loan based on your current situation, you don’t want to do anything to change your credit score. Paying off old debt activates it again, which usually means a lower credit score. The only time you should touch old debt after receiving a preapproval is at the closing when the lender requires it. Most loan programs do require you to pay off old debt, such as collections or judgments, but at the closing. This way the lender can verify the funds and your credit score is not affected until after you own the home.
Make Large Payments to Existing Debt
You might think you are doing a good thing by paying off a large debt, but it can hurt your approval to close on your home. If you need every penny of your assets to close on the home, you could be left without funds to close. In addition, some lenders require a certain number of months’ worth of reserves on hand at the closing. If you use those funds to pay off a debt, you no longer meet the minimum requirements of the loan program. This can hamper your ability to close on your home.
The best thing to do to avoid credit mistakes before you close on your home purchase is to do nothing! Only listen to what the lender tells you to do. If he says you need to pay off a specific debt, do it at the closing. Don’t ever open new credit or touch your existing credit. Consider your financial situation frozen in time until you close on your home. The time period between loan approval and loan closing is usually between 30 and 60 days, so it is not too long to have to wait. This way you know your credit score will remain fairly stable and your debt ratio untouched.
With nothing changing before the closing of your loan, the lender does not have to do any new calculations. It takes the risk of losing your loan approval out of the equation. Everything you need to do with your available credit can wait until the day after you close on your loan. By this point, the lender already verified your credit score for a second time and approved you for the loan by funding the purchase of your new home. This helps you to avoid any credit mistakes that could hurt your chances of buying a home.