Making the steps toward purchasing a home is an exciting endeavor. Even so, many people are surprised to discover the degree of financial planning and financial literacy that goes into buying a home. Typical home purchases are financed with assistance from lending entities such as mortgage brokers, mortgage banks, traditional banks, and credit unions. These lenders offer varying interest rates and timelines for loan repayment, and they determine these criteria based on a variety of factors including an individual’s credit score. In this blog post, we elucidate the reason for credit pulling by major lenders, and how it impacts the lending process.

First-Time Homebuyers

For first-time homebuyers, exploring loan and mortgage financing options is essential. However, more often than not, first-time homebuyers have not yet established substantial credit history. This is called “nontraditional” credit history. Nontraditional credit history isn’t an absolute deterrent to obtaining a mortgage, but it may limit options. A long and healthy credit history inspires confidence for lenders and gives them information about how likely their loan is to be repaid in a timely fashion. Many people choose to open a secured card or line of credit in order to bolster their credit scores and establish a more substantial credit history. 

How (and Why) Credit Score Impacts Mortgage Rates 

Outside of credit history, another major contributing factor that lenders examine before initiating a mortgage loan is the individual credit score as a whole. A credit score is determined by a varying degree of components. Such as; the age of accounts, successful/timely payments, credit diversity, balance to limit ratios. Generally, a lower credit score will alert lenders that the loan may not be repaid in a timely manner and decreases confidence. To counter this, most lenders will still offer a mortgage, but at a higher interest rate. A high credit score displays fiscal responsibility and inspires confidence. Consequently, homebuyers with higher credit scores will have a wider and more quality array of interest rate options. 

How Credit Checks Impact the Homebuyer 

Aside from the aforementioned relationship between credit score, credit history, and mortgage options, there are additional details to be aware of after a lender checks or pulls, your credit information. If the credit check registers as a hard inquiry, it has the potential to temporarily lower your credit score. Mind you, this is necessary if you do want to apply for a mortgage. Inversely, if you request your credit report, it will have no impact on your credit score. You are able to get a free copy of your credit report, from each bureau once per year. A credit report contains in-depth details from your credit history, and it is recommended that individuals order and thoroughly review their credit reports at least 6 months before beginning the process toward buying a home. 

At Mortgage Maestro, our seasoned team strives to simplify the process of buying a home. We seek to inform and empower potential buyers while presenting all available options. Additionally, we may be able to give you real-life credit score hacks to help increase your score so that you can get the best terms when you go under contract on your home. For more information about buying a home or obtaining a loan, visit our website, check out our regularly updated blog, or contact us.