How to Shop for a Mortgage Without Hurting Your Credit
When you find a mortgage and apply for a home loan – whether you are a first-time homeowner, upgrading to a new home, or buying investment properties – your credit doesn’t need to be affected.
While one approved mortgage won’t do much to your credit rating, applying for multiple mortgages can affect your credit.
For example, if an applicant applies for multiple loans in a short amount of time, they are more likely to be declined. These applications don’t have to all be mortgages. Credit cards and school or car loans can also be a factor.
Even if your credit is not negatively affected, every application a lender makes on your behalf is documented. This means when your credit score is requested from the Credit Bureau, all applications – whether accepted or denied – are listed.
But there is a way to apply for a mortgage while minimizing the hit to your credit score:
How to Shop for a Mortgage
Steps
Shop for Mortgage Lenders
While shopping to know your options is a good idea, applying can hurt your credit score. A credit report is most likely to get dinged when there are applications for multiple loans in a short amount of time.
This is especially if they do not get approved. Other loan applications such as credit cards, or even school and car loans should not be applied for close to your mortgage application. Finding a lender may sound like a daunting task, and the easiest route is to stick with the bank you are most familiar with.
However, you can easily shop around for mortgages online easily and even compare mortgage lenders without actually applying. Make sure to collect all the information you can before submitting an application. This will help to protect your credit rating.
Budgeting
When you want to find a mortgage and compare mortgages from different lenders, start by budgeting out how much you can afford for a down payment. The down payment is due before the home is yours and is calculated by taking a small percentage of the total purchase amount of the home. Most down payments range from 2.5% to 20%.
Below is a basic example of calculating how much money you would need to pay as a down payment:
If you apply for a mortgage on a $500,000 home, a low down payment amount would be 5% or $25,000.
This would leave you owing $475,000 on your mortgage. Now add interest to that and plan on making monthly payments for up to 30 years.
Think of a mortgage as a new relationship. Some people fall in love with a house and then try to come up with a budget down the road. Unfortunately, this may put you in a situation where you can’t afford the mortgage and consequently other things in life.
While the American dream includes being a homeowner, you want to make sure that you reach this goal in a financially sustainable way and budgeting is the best way to do this.
Submit Your Application
Once you have shopped around for the right mortgage lender, have your down payment set aside, and feel comfortable with the monthly payments, submit your application. The lender will do most of the work from this point on, leaving you to present copies of important legal documents.
- Copies of a valid ID such as a driver’s license and passport are initially required.
- Federal taxes from the previous year or two are also required.
- Any income and all assets should be declared to increase the likelihood of your mortgage application success.
Any debts such as other mortgages, credit cards, school and car loans, etc. must also be declared. These documents are required of every person wishing to be put on the title. Respond quickly to any questions the lender may have, as this will help speed up the submission process.
If your initial mortgage application is not approved, hold off on applying for others, and consider lowering your requested amount. Too many applications can potentially affect your credit, especially if they are not approved.
Re-evaluate your budget and apply again down the road so your credit doesn’t show multiple applications close together.
If you are approved, it is called a Conditional Approval only, so you don’t have the keys to the house – yet. You will need to sign the Purchase Agreement, and then the lender will order the home appraisal and Title search.
Now is the time to get your down payment amount ready. Talk with your lender about the best way to pay. Most of the time it can be as a cashier’s check or a wire transfer. be cognizant of any additional closing costs as well.
Your credit will not be affected after your application is approved.
Home Ownership
On closing day, you will receive the keys to your new home. This is an exciting time for new homeowners, but also tends to be expensive. On top of just having paid your down payment, you are now taking on a monthly mortgage payment.
There are also moving costs, as well as things that undoubtedly need furnishing or replacing. Continue to budget accordingly, so as to not hurt your credit by applying for more loans. Remember, having a mortgage is like a long-term relationship, and the foundation is key.
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