Over the Holiday Season, many people might be ready to purchase a home, however, there a few common mistakes you can make that might hinder your ability to do so. While there are many things you can do to prepare to purchase a home, sometimes the things you think might help, such as eliminating your debt or closing credit accounts, can actually make your purchasing odds worse.
Closing Your Credit Accounts Before You Purchase a Home Even if They Have $0 Balances
Contrary to common belief, closing credit accounts, even accounts you no longer use, can actually hurt your credit store, and thus weaken your buying power. When you have open credit accounts, you have one big “umbrella” of your credit limits. For example, if you credit limit in total across all of your accounts is $20,000, and you are using $5,000 of your limit, you are in total, only using 25% of your limit, however, if you close one of your accounts that has a $5,000 limit, your total limit is lessened to $15,000, meaning the save $5,000 is usage has actually raised your credit usage to 33.3%. When purchasing a home you want to try and have your credit usage percentage as low as possible, so even if you have accounts with $0 balances, keeping them open will positively impact your credit usage overall.
Another thing to keep in mind when it comes to closing credit accounts is your ability to show your credit history length. Having a long timeframe of credit history show responsible payments over a long period of time. What many consumers don’t realize, is your credit history length actually makes up nearly 15% of your overall score.
Applying for New Credit Before You Purchase a Home
If you’re planning to purchase a home in the near future, one of the easiest ways to hinder your ability to do so is by applying for a new credit purchase. This can range widely from applying for a new car loan, care credit for a pet emergency, a new credit card promo with a statement balance, etc. All of these scenarios will make it harder for you to get approval to purchase a home. While the above scenarios with closing accounts might lead you to believe that opening new accounts will boost your overall credit usage by adding to the “umbrella,” when applying for any type of new credit your credit with have what is referred to as a “hard inquiry.” These inquiries will each lower your credit score, causing it to dip.
If you’re needing a new car, a new credit card with a mileage plan, etc. it is best to try and wait to apply for the new accounts until after you’ve closed on the purchase of your new home.
There are many more common scenarios that might hinder your ability to purchase a home such as your debt-to-income ratio (DTI), total credit card usage, credit scores, down payment amounts, income verification, etc. Make sure to talk to your lender about our financial obligations and requirements for a home purchase to make sure you understand the full process. One of the greatest tools you can use when starting to plan for purchasing a home is meeting with a lender and getting a pre-approval letter.
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