How New Credit Affects Your Credit Score
When qualifying for a home loan and determining the interest rate, your credit score is critical. The lower the interest rate, the better the credit score must be. Therefore, any action that has the potential to negatively impact your credit score, such as taking out more credit, must be carefully evaluated. Even a small loan may make a significant impact. When contemplating whether to take out a loan or apply for new credit before applying for a house loan in the future months, it’s important to be informed about the options available to you.
Why is Your Credit Score Important in Getting a Home Loan?
Lenders use your credit score as a measure of your financial dependability and reliability. In the eyes of lenders, the better your credit score, the more trustworthy you appear to them.
There are five areas to look at:
- Do you pay your bills on time?
- The age of the first credit available.
- The amount of credit you’re utilizing in relation to your credit limit.
- Your ability to obtain further credit.
- Your credit mix, including mortgages, student loans, and credit cards.
Two Types of Credit Inquiries and How They Affect Your Score
When applying for new credit, there are two types of inquiries: soft and hard, and each has a different influence on your credit.
Soft inquiry (also known as a soft pull) is often used as education. When an employer runs a background check on you or you’re getting preapproved for a home loan, for example. Your credit score is unaffected by this type of query.
When you’re trying to establish fresh credit, such as for a mortgage, credit card, student loan, or vehicle loan, a hard inquiry (or hard pull) occurs. A hard inquiry does influence your credit score, and it temporarily reduces it. A normal hard inquiry can lower your credit score by 5 points each time it occurs. Although this may appear to be a significant drop, “new credit” contributes for just around 10% of your overall score, and it normally rebounds within a few months. However, if you’re shopping about and applying for multiple loans “just to see if I get approved,” the negative impact can quickly build up and drastically damage your credit score.
"Can I Still Get a Mortgage if I Just Applied for a Loan?"
Hard inquiries will have a little impact on your credit score, but not enough to prevent you from being approved for a house loan. If you’ve paid your payments on time and kept your credit utilization low, your prospects of getting a low-interest house loan are very good.
Are you unsure if there are any prerequisites you must meet before applying for a house loan? We can assist you!