Mortgage Planning: Beware Credit Score Drops

April 23, 2022

When is it possible to experience a credit score drop before filling out a home loan application? A reduction in your FICO scores could happen for several reasons; if you are worried about your ability to be approved for an FHA home loan with your FICO scores, it can help to know what can hurt your credit while you are still planning and saving for your mortgage.

A few simple things can happen that will hurt your credit scores before you apply for a home loan. These are not the only issues, but what we discuss below are some of the most common problems to anticipate. 

Payment History

A late or missed payment can hurt your FICO scores, and multiple late or missed payments are issues to be concerned with. Your lender needs to find a pattern of on-time payments on all financial obligations and other general indicators that you are a good credit risk.

Don’t be late or have a missed payment for a minimum of 12 months before you apply for any large line of credit including an FHA home loan.

Thanks to modern tools like ACH withdrawals, payment apps, and other tech, you can avoid missed payments. Try setting up as many automatic payment options as possible. You may find that dealing with all your bills yourself may result in unintentional late or missed payments. For some, this is not an issue but if you’re concerned, automatic payments can make a big difference.

Avoid Hard Credit Inquiries

Your credit score can take a hit when applying for a line of credit. If you get a hard credit inquiry, your FICO score may be lowered as a result. That lower score may not be permanent, but the closer you get to your mortgage application or FHA loan pre-approval process, the more likely such a hit to your FICO scores could spell trouble ahead for the mortgage.

And it’s not just reduced FICO scores themselves; the fact that you applied for more credit so close to your home loan may serve as a red flag for the lender.

Part of the lender’s job is to make sure you can afford the loan, and if you add more potential debt to your financial picture that may make it harder to justify approving the mortgage.

Of course, circumstances will vary and some may have an easier time being approved than others in this scenario. But you will want to make sure you have every opportunity to get your FHA mortgage approved, which is why you should avoid new credit in the 12 months leading up to your mortgage if you can help it.

By working on these issues far ahead of your mortgage application, you can improve your credit scores and make yourself a more attractive loan candidate. It’s best to err on the side of caution when planning a mortgage and if you need to give yourself more time to work on your credit, that extra effort may pay off when it’s time to apply.

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