Whether you’re currently in the market for a home or plan to buy in the distant future, listen up: The 2008 Great Recession, among other things, changed the rules of homebuying by drying up credit. Here are three things you need to know so you don't hurt your credit score:
1. Fannie Mae and Freddie Mac Rule Everything
First time buyers have long dealt with Fannie Mae and Freddie Mac—federal organizations that help keep mortgages available. Nowadays, they’re the only game in town. More than 70% of mortgages currently being issued are supported in some way by Fannie or Freddie, so every banker follows the guidelines of these federal organizations. In the past, if you didn’t like the insurance requirement of your Chase or Wells Fargo mortgage, you could go to Citi or Bank of America. Now, however, all the lenders are following the same playbook, so most banks will have the same paperwork requirements. The good news: Though the insurance and paperwork requirements will be mostly the same across the board, you can still shop around for rates.
2. There’s a Spectrum of Credit Scoring
It used to be that you’d get a mortgage if your credit was “good” and you’d fail to get a mortgage if it was bad. In recent times, though, the spectrum of credit scores counts for more than it used to. Homebuyers—and apartment buyers—can currently get mortgages with less-than-perfect credit…but, per Fannie and Freddie, each one of these intermediate steps between “trashed” and “perfect” costs money. That mandated surcharge can take the form of an upfront fee, or it can be hidden in the loan in the form of higher payments. On a $200,000 loan, for example, the shading between “perfect” and “quite good” can cost $1,500, while the shading between “quite good” and “good” might cost another $1,000.
3. Wait Until Your Home Purchase Closes Before You Buy a Car
When you’re shopping for a mortgage, each bank you apply to will check your credit score. Multiple requests for your credit score are okay during mortgage shopping, but your score may take a temporary hit if you throw in credit checks from another loan—like the dealership that’s going to finance your new Subaru. Even if the dip in your credit score (from all of these credit checks) is temporary, the lower score can translate to more than a thousand dollars extra in upfront mortgage fees. Bottom line: Make one big purchase at a time. Wait until your home purchase closes before you buy a car.
All in all, it’s still more than possible to land a great mortgage—but the key is to keep an eye on your credit score in order to make the most of it.