Will a New Credit Card Affect a Mortgage Application?
In a housing market as wild as today’s, house hunting and preparing for the mortgage application process can seem overwhelming. The last thing you want to do is make it even more complicated. While it may be tempting to find your dream house, then buy a new car and new furniture all at once, you may want to pump the brakes. Opening a new credit card or credit line during the mortgage application process can hurt you instead of helping you.
Hard Inquiries Can Lower Your Credit Score
Getting a new credit card can ultimately help you build good credit when it’s managed well. But during the mortgage application process is not the time to do it. When you apply for a new credit card, the card company reviews your credit score. This results in a hard inquiry, otherwise known as a “hard pull”. Creditors do this to see how much risk you pose as a borrower.
As a result, these hard inquiries show up on your credit report and can lower your credit score by a few points. A few points may seem like no big deal, but during the mortgage application process, it can make a difference in the interest rate you earn over the lifetime of your mortgage. A drop in credit score can also impact the size of the loan you qualify for.
It’s important to understand that your credit is pulled both when you begin the mortgage application process and, again, before you close on the house. You may really want to purchase a new couch on your credit card before you move in, but it’s best to hold off until after closing. That new couch could cost you valuable interest rate points on your mortgage.
Average Age of Credit May Decrease
Opening a new credit card during the mortgage application process or applying for a loan could lower the average age of your credit. Here’s an equation to help explain:
Average Age of Credit = Total months of all accounts on your credit report ÷ Number of accounts
Let’s say you have four credit cards. One of the cards is five years old, one is 25 years old, and the other two are three years old. The average age of credit is 108. Now you open a new account. It’s only a month old. Do the math, and your average age of credit is now 86.6. The addition of that card has lowered your average age of credit.
While this may not seem significant, the length of your credit history and average age of your accounts makes up roughly 15% of your credit score. It has an impact on your credit score and could negatively affect your mortgage application.
Credit Utilization Ratio Will Change
Your credit utilization ratio is the amount of revolving credit you’re using divided by your total available credit. Let’s say you have a credit card with a $2,000 limit, and you make an $1,800 purchase. Your credit utilization ratio will go up drastically. An increase in your credit utilization ratio causes a downturn in your credit score. It’s best to keep that percentage low. Aim to keep it at no more than 10%-15%.
Just because you have a credit card with a $20,000 limit does not mean you should max it out. Remember that couch you wanted? Buying a $4,000 couch during the mortgage application process could affect that credit utilization ratio and lower your credit score.
Your Interest Rate May Increase
If new credit lowers your credit score, you could see an increase in your interest rate. Since your lender will pull your credit before closing, this could make an impact. That $4,000 couch could cost you thousands over the lifetime of your loan, depending on how long you’re financing your house. Here’s an example:
A $300,000 mortgage loan at 3.00% APR for 30 years would have a monthly mortgage payment of $1,264.81. You’ll pay $155,332.36 in interest during the life of the loan.
The same $3000,000 mortgage loan for 30 years at 4.00% APR would have a monthly mortgage payment of $1,432.25. You’ll pay $215,608.52 in interest with this increased rate. (Source: Alliant Credit Union)
At this point, you’ve probably gathered that you should not take on any new credit during your mortgage application process. That includes making large purchases on current credit cards. It’s best to wait a few weeks after closing to open a new credit card or to make large purchases. It’s a good idea to track your credit reports and scores in the months leading up to your mortgage application as well.
Maintaining good credit will only make the process easier and bring you one step closer to securing your mortgage. PlainsCapital has several online resources to help you navigate opening a new credit card or line of credit when the time is right, while PlainsCapital’s subsidiary, PrimeLending can help you find the home loan that’s right for you.