For generations, owning a home has been considered an integral part of the American Dream. Life without a home of your own, the two kids, golden retriever, and white picket fence just don’t make sense. Okay, that last part may be a bit of an overstatement, but the fact remains—well-meaning family members and financial experts alike have long recommended homeownership as a sensible path to financial stability.
When done correctly, buying a house can be one of the smartest investments you’ll ever make. It will undoubtedly be one of the biggest. As a first-time home buyer, your finances will face the scrutiny of mortgage underwriters, so it’s essential to have all your economic ducks in a row before you even begin applying for a mortgage. And while a smooth financing process is reason enough to be smart with your money, financial stability can also help when your credit takes a hit for five or six months following your big purchase. Wait. What?! Yep. That’s right. Your credit score can—and probably will—drop for a few months after you become a homeowner.
Great for you. Not so great for your credit.
Why does buying a house—which, by all accounts, is a wise financial decision—have a negative impact on your credit? The answer isn’t as crazy as you might think. When you apply for real estate financing, mortgage companies pull your credit report to determine whether it makes sense for them to lend you money. In credit industry terms, this is known as a “hard inquiry.” Since these inquiries signal you could be incurring additional debt, they often result in a small, temporary dip in your credit score.
Fortunately, it’s relatively simple to limit the negative impact of hard inquiries. If you’re going to apply for financing with multiple mortgage lenders, do your best to conduct all of your searches within a 30-day window. Because they understand that many people shop for the best rate even though they’ll only secure a single loan, major credit bureaus structure their rating systems to account for multiple inquiries within the same one-month reporting period. While there may still be a dip in your score, grouping your credit pulls will help you minimize the damage. And don’t worry, once you start making payments on time and establishing a positive mortgage history, your credit score should bounce back to where it was before.
Experience a little short-term pain for a long-term gain.
From the opportunity to build equity to the satisfying sense of home ownership, there are a variety of excellent reasons to leave the renting life behind. A temporary dip in your credit score shouldn’t scare you away. If you entered the home-buying process with your finances in order and you resist the temptation to rack up additional debt as you furnish your new home, your credit rating should be just fine in the long run. And let’s be honest, you’ll probably be so busy remembering the new route to work and rearranging your living room furniture that six months will pass before you’ve had a chance to think about your credit score anyway.
If you’re just beginning your home search, your local Sierra Pacific Federal Credit Union branch is a fantastic place to start. In addition to reviewing your current financial situation, our representatives can also help you determine how much house you can afford and which mortgage program is right for you. We may even be able to help you get pre-qualified, which can give you the extra leverage you need when you find the perfect house.