New Homebuyers Often Learn Too Late About Credit

Mary and Joe Johnson (actual client’s names were changed) are a young couple who have lived in a three bedroom apartment for a little over two years with one small child and another on the way. Mary had worked on a part-time job for a little over a year and decided to become a stay at home mom. Joe made good money and had been on his job several years and had just received a promotion.

They had saved a few thousand dollars and he had money in a 401K that he could tap into if necessary. Knowing that their lease would be up in the next two months, the couple decided it was time to start looking for a home. When they came to see me, Joe knew his credit score wasn’t perfect, but he thought he was in pretty good shape. When I pulled his credit he was very disturbed to find his credit score had dropped 40 points. “But my score was 640 when I purchased my truck just 3 months ago. How could my score drop that much.” he said baffled.

I see this scenario over and over again, clients with good incomes, stable residential and work histories but recently lowered credit scores. After reviewing Joe’s report, I realized his credit score dropped for several reasons. First, the recent purchase of a new SUV coupled with the fact that he had several recent inquiries caused Joe’s credit to take a major hit. In addition, the new monthly SUV payment also increased his amount of debt which also lowered his score.

Joe was also shocked to learn that the car payment meant he would qualify for less house and his lowered credit score would also raise his interest rate. “If I knew the car payment was going to reduce the amount of house I could purchase, I would have gotten a cheaper vehicle.” Joe now says.

The first mistake that people often make is to purchase a new vehicle right before they start looking for a home. Borrowers looking to purchase a home in the near future, (within the next 6 months to a year), will want to wait until their home loan has closed before purchasing an automobile.

Second, many buyers wait until their lease is getting ready to expire before they begin their home search. By working with your mortgage consultant well in advance of the move, buyers will be much better informed about the mortgage process and the steps they need to take to secure the best financing.

Third, be careful about letting too many companies pull your credit, since inquiries generally remain on your credit report for two years from the date reported. It’s also a good idea for home buyers who are planning to purchase a home in the near future to discuss their plans with a mortgage consultant who can provide a free credit analysis and help them prepare for homeownership.