5 Ways First-Time Homebuyers Hurt Their Credit Scores

Looking to score your dream home? Start with your credit score.

Everest’s list of financial no-no’s helps boost your homebuying odds.

Many first-time homebuyers are overwhelmed by the process—and for good reason.

Taking this monumental leap involves a series of complex steps from working with your realtor, mortgage broker, and insurance provider to navigating escrow, title insurance, home warranty, and more. That’s a whole lot of people—and a whole lot of fees!

Not to mention, today’s shoppers face rising interest rates, scarce inventory, bidding wars, and other temporary hurdles. And while working with a solid team of professionals helps eliminate most of the burden (think: Everest!), homebuying is still a stressful experience.

When you boil everything down, the single greatest stressor is the same for everyone.

Did you guess it?

Yep—money.

More specifically, your personal credit score is a critical factor when determining your mortgage eligibility and overall desirability in the eyes of lenders. So, it’s best to do all that you can to improve your score before embarking on this lifechanging journey.

More mortgage, more problems?

When going for a loan, your personal credit score is one of the first factors the bank will consider (the majority of lenders look at your FICO® score).

“Lenders grant credit based on their confidence you can be trusted to pay back what you borrowed,” says Stephen Rosen via Realtor.com. “If you are worthy of a lender’s financial trust, you are said to be creditworthy, or to have ‘good credit.’ Building credit is almost like building a reputation with lenders.”

The credit score system is difficult to decipher, but here’s an overview of the major credit ranges and how they reflect your ‘creditworthiness.’  

Credit Score Breakdown

The good, the bad, and the ugly

–    750-850: Excellent. Sign on the dotted line.

–    700-749: Great. We can work with this.

–    650-699: Okay. So, here’s the thing…

–    649 & lower: Uh-oh. That’s going to cost you.

Long story short, your credit score is a powerful indicator for banks. It speaks volumes about your money management (or mismanagement!) before you ever walk through the door. Naturally, you want to achieve and maintain the highest number possible.

Settling the mortgage score

To determine how much home you can afford, banks also examine other aspects of your finances including income history, bank statements, current assets, etc. When you apply, pretty much everything money-related applies!

For now, we’re overlooking those factors. Putting your credit score center stage is the first step to maximizing your first-time homebuying experience.

So, you ready to go home? Follow Everest on the fast-track to mortgage approval!

5 Ways First-Time Homebuyers Hurt Their Credit Scores

1. Missing payments

Paying your debts in a timely fashion is the first step to padding your credit score. If you have a consistent record of late or missed payments, your number is sure to stall—and fall.  

“Whether or not you’ve paid your bills is a top concern for lenders,” says Erica Sweeney of Realtor.com. “As such, your payment history makes up 35% of your credit score.”

Pro tip: If you have a faulty memory, take advantage of auto-payment options for your credit cards, car loans, phone bills, and other monthly obligations.   

2. Keeping high balances

The amount of debt you are carrying makes up an additional 30% of your cumulative credit score. So, if you’re going for a mortgage, it’s best to avoid maxing out your cards each month.

According to Sweeney, “Ideally, you want your credit utilization—the amount of debt you have compared with your credit limit—to be low, about 30% to 40%.”

Pro tip: If you use a banking app, set up alerts so you can keep track of your used credit.

3. Having spotty credit history

Most people know that having ‘no credit’ is a bad thing. Typically, lenders want to see at least 24+ months of consistent credit history to form an accurate picture of your payment habits. But did you know that short spurts of credit activity can actually harm your score?

Sweeney notes, “The length of your credit history makes up 15% of your score. And the longer your accounts remain open, the better.”

Pro tip: If you have an old card that you don’t use, keep the account open! Try to use it now and again to show longer credit history.

4. Having a limited credit mix

A mix of credit means active accounts from a diversity of sources. For instance, instead of having five open credit cards, it’s better to show two credit cards, a student loan, car loan, and rent payment history. This ‘credit mix’ makes up 10% of your report.

Still, Sweeney warns, “Don’t open extra credit cards or take out new loans for the sake of having a good mix of credit if you can’t handle paying them.”

Pro tip: Make sure the bills you are paying are actually in your name! For instance, if you are young and your parents are helping you take out a car loan, make sure you are also listed as a borrower.

5. Having too much new credit

The final 10% of your credit score is called ‘new credit.’ Meaning, if you open a bunch of accounts at once or apply to multiple credit cards in a short period of time, that’s a red flag.

“[Lenders] interpret this as a signal that you have difficulty handling credit,” says Sweeney. “Furthermore, opening new lines of credit decreases the average length of your credit history, which can also hurt your score.”

Pro tip: Educate yourself about how credit scores are determined and build your credit strategically over time.

Everest says: Congrats, homebuyer!

We give you full credit.