As the holiday shopping period kicks off this weekend, many retail and online stores will be offering special discounts to those applying for their exclusive credit cards. I like saving money as much as the next person, but if you are planning on purchasing a home in the near future, applying for these cards probably isn’t a good idea.
When you apply for a mortgage, your lender is going to consider 3 factors, your credit, capacity, and collateral. Mortgage Credit Scores range from 300-850. Higher scores equate to better terms for your mortgage. Just 1 point can save you thousands in closing costs and interest paid over the life of your loan.
So how will applying for that new credit card affect your credit score? New credit determines 10% of a FICO Score! Research shows that opening several new credit accounts in a short period of time represents greater risk – especially for people who don’t have a long credit history.
15% of your FICO Score is based on length of credit history. As a rule, a longer credit history will increase your FICO Score. Your FICO Scores take into account:
- How long your credit accounts have been established, including the age of your oldest account, the age of your newest account and an average age of all your accounts
- How long specific credit accounts have been established
- How long it has been since you used certain accounts
If you have limited credit, a new account can reduce the average age by as much as 50%,
Properly managed credit cards and installment loans with a good credit history will push up your credit scores. FICO considers credit utilization or the amount owed on specific types of accounts, such as credit cards and installment loans. A high percentage of a person’s available credit being used can indicate the person is overextended. They are more likely to miss or make a late payment. Your new store card is likely to have a low credit limit, resulting in a higher utilization percentage and a lower score.
The second consideration is Capacity, your ability to repay the loan, as well as having the necessary money for the down payment and closing costs. I read recently that 80% of renters consider money for a down payment and closing costs an obstacle to owning their own home. Nevada has extraordinary down payment assistance and first time homebuyer programs for credit worthy buyers. The Nevada Rural Housing Authority and Nevada Housing Division offer non-repayable grants through their “Home at Last” and the “Home is Possible” programs. If you have a 640 or better qualifying credit score, earn less than $95,500 annually and are purchasing a home for less than $400,000, you may qualify for a non-repayable grant equal to 3-5% of your loan amount. There isn’t any first time buyer requirement. Imagine buying a home for $250,000 and receiving a grant for $7,200 to $12,500.
I know you are asking, how is this related to applying for a credit card and saving on my holiday purchases? There is a very high probability that applying for the credit card will lower your credit score. If you credit score drops below 740, you will no longer qualify for the grant program costing you thousands of dollars in down payment assistance.
Imagine you qualify for either the “Home is Possible” or “Home at Last” 3-5% non-repayable grant but your score is a 659, rather than 660. Based on a $250,000 loan, the difference of just 1point will add $2,500 to your closing costs. Now suppose you have excellent credit, what difference could 1 point make? The “Home at Last” and “Home is Possible” HFA conventional loans are the most cost effective products for buyers with good credit. You can purchase a home with as little as 3% down if your qualifying credit score is 680 or above. Loans for more than 80% of the purchase price require private mortgage insurance. The cost of private mortgage insurance is credit sensitive. Based on a $250,000 loan, a buyer with a 680-719 credit score will pay $41.67 more a month than the buyer with a 719-759 credit score.
The final consideration is the collateral. Is the home you are purchasing worth what you are paying? Your lender will require an appraisal to make this determination.
Mortgage rates and costs are credit driven. Your credit score will determine the terms of your mortgage, the interest rate and costs. As little as 1 point may be the difference between receiving or not receiving thousands of dollars in non-repayable grant money for your down payment and closing costs. What will you save by applying for that credit card? What can it cost you if you are considering buying a home? If you are considering purchasing a home within the next, please just say no!