Avoid these Credit Mistakes When You're About to Buy a House

Purchasing a new home

The following is presented for informational purposes only and is not intended as credit repair.

Buying a new house can be an exciting time, but if you don’t protect your credit while making this huge financial commitment, you can end up paying more than you should. Poor credit can lead to higher interest rates and, if you can’t afford the larger payments, you could end up losing your house or living “house poor.” When it comes to buying a house, here are the credit mistakes you need to avoid:

Accepting Bad Loan Terms Due to Poor Credit

While you can certainly purchase a home if you have bad credit, it’s not recommended. Bad credit leads to bad loan terms, which means higher interest rates which leads to higher monthly payments. If your credit is poor, work on improving it before you start house-hunting. (Note: you should always request a copy of your credit report before making any large purchase so you know what you’re up against.) While this may make the process of landing your dream house a little longer, it will be worth it in the end.

You can improve your credit by paying off debt and lowering your debt-to-income ratio. Also, lower the percentage of available credit you’re using and work to remove negative information from your report.

Read more: Ultimate Guide to Rebuilding Your Credit

Falsely Disputing Negative Items on Your Credit Report

You can dispute some of the negative information on your credit report like late payments and charge offs, but you should only do this if the information is inaccurate. After they receive a dispute, the credit bureau has 30 days to review and determine whether or not the reporting in question was made in error. If they can’t make that determination in time, the negative mark will be removed – temporarily, that is. Eventually, they will complete their review and if the disputed notation was not in error it will be returned to your report.

Read more: How to Locate and Correct Errors on Your Credit Report

If you’re concerned about negative marks on your credit report, remember that the impact of all negative marks diminishes over time. Just keep using credit wisely and those past mistakes will become less of an issue.

Not Improving your Credit Utilization Ratio

Just because you have credit available does not mean you should use it all. Your credit score is generally improved when you keep your credit utilization ratio low. This means that you have more credit available to you than what you’re using.

Read more: How to Find Your Credit Utilization Ratio

Usually, your credit utilization ratio should be 30 percent or less. When applying for a mortgage, the lower the better – if you can get it below 20 percent, that would be ideal. That means you use less than 20 percent of the credit available to you. If you have a total of $10,000 in your credit card limits, you would have less than $2,000 in debt. If your ratio is higher than 20 percent, start paying down debt before applying for a mortgage.

Allowing Your Credit Score to Go Down Before Closing

Getting pre-approved for a mortgage is the best way to find a home you can afford. You’ll know before you start shopping what you can afford so you won’t fall in love with a house only to find out you’re not approved for it.

However, pre-approval is not a guarantee that you’ll get the loan. The mortgage company will pull your credit report again before closing and if your report has changed for the worse (and your score has dropped as a result), your loan may be denied. After you receive a pre-approval, be careful about missing payments, applying for new loans or credit cards, and increasing your debt. In fact, improving your credit score after pre-approval can lead to better loan terms in the end.

Buying a house is the biggest purchase you’ll ever make and you’ll be paying for it for years to come. Make sure you do it right and get the best terms possible by avoiding making these mistakes to your credit.

If you’re ready to make the leap to homeownership, MMI offers a variety of counseling and online education programs for soon-to-be homebuyers. Prepare yourself (and your finances) for the challenges of owning a home and put yourself in the best position to thrive in the years to come.

Tagged in Build your credit score, Understanding your credit report, Mortgages and foreclosure

Emilie writes about overcoming debt, while balancing trying to eat healthy, stay fit, and have a little fun along the way. You can find more of her work at BurkeDoes.com.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.