topic Specifically how does applying for new credit prior to mortgage application affect approvability? in Mortgage Loans

Specifically how does applying for new credit prior to mortgage application affect approvability?

Anonymous — Sat, 11 Feb 2017 16:13:55 GMT

I've read that it's not a good idea to apply for credit cards or loans within as much as 12-24 months of applying for a mortgage. I understand that in the short term credit score could suffer as a result (due to the inquiry, decrease in average age of accounts, whatever), but with such a long buffer recommended it makes me wonder if there are additional reasons.

Is that recommended solely because of the possible impact on credit score? Or are there other reasons? Will a mortgage lender look at your credit report and penalize you for "recent" inquiries or new accounts?

FWIW I'm fortunate to have good credit scores right now and further fortunate that I can probably pretty easily get them into the excellent range by decreasing credit card utilization. My preferred way of doing that would be to open a new credit card (FWIW I only have one personal card currently) with a good balance transfer offer, or take out a low interest personal loan (I can even get a secured loan that doesn't require a hard inquiry). I'd then charge purchases to my current card and pay it in full each month while paying down the balance of the new account.

But, I don't want to do anything that would jeopardize ability to get approved for a mortgage anytime soon (let's say as soon as 2 months). I think credit card utilization / low total limits are the main things suppressing my score and I'm guessing either of those approaches would probably result in a substantial immediate net gain in my credit score (the generic ones anyway -- not sure about the mortgage ones) due to immediately reducing the credit card utilization (in one case by gaining additional total credit [and I'd anticipate the limit on my current card increasing when the util dropped sufficiently too], and in the other by reducing the utilization to zero). And I'd only expect the situation to improve from there as I currently have a low number of accounts and no current installment loans.

For that matter, how long does my utilization need to be squared away for before applying for a mortage? Let's say it's unacceptably high now and I paid it in full before the next due date and the credit card company reports that to the credit bureaus 3 days later. Would I then be good to go to apply for a mortage (as far as that issue is concerned), or will they look back at previous utilization, requiring me to keep it acceptably low for some particular amount of time?

Aside from impact on score, would a mortgage lender be likely to look at new credit in the form of credit card / personal loan / auto loan any differently? I believe I have read that they frown upon getting a new credit card and starting to accumulate a balance.

Thanks!

Re: Specifically how does applying for new credit prior to mortgage application affect approvability

Anonymous — Sun, 12 Feb 2017 18:18:35 GMT

Excellent questions! I opened a new credit card back in November. And I'm consolidating student loans right now so I'm curious what the answer will be.

Re: Specifically how does applying for new credit prior to mortgage application affect approvability

Revelate — Sun, 12 Feb 2017 20:18:04 GMT

Inquiries count for an entire year certainly on the algorithms used for mortgage underwriting.

As a non-contrived example as this made a difference for me: at 3 inquiries on Equifax my FICO 5 is a 693, with 2 inquiries it is a 700. There is a difference between having a 680 and a 700 for conventional loans as they are different tiers for almost everyone last I checked, so if you're not gold plated that's why one shouldn't open up accounts within the year beforehand ideally... mortgage >>>> any credit card, it's not even really comparable honestly. Focus on the prize.

Some clean files also see penalties for new accounts beyond the AAOA reduction issue, but in general any new account is a penalty and it's best to just have those as far back in the past as possible when we're talking the largest financial and credit decision of one's life.

Revolving utilization is instant in time, so yes if your lenders report your now pretty utilization, you can go shopping. Leaving points and therefore often money on the table if you aren't as clean as possible (up till 740/760 anyway).

What UW thinks is up to the individual UW in many cases unfortunately; for me I had to explain any inquiries within the recent 4 months, and certainly 2 months out I'd be sitting on my hands unless my car up and died and I had to replace it... getting personal loans or opening new credit cards isn't exactly a demonstration of financial stability in general, though getting a personal loan to consolidate credit card balances can be a win both from a FICO and DTI perspective, but just be prepared to explain it.

6+ months out and if someone is on a bubble (especially on EX), maybe it makes sense to tweak one's file a bit or if one is truly a thin file, but in general, just chase the goal of a mortgage and ignore the other shiny things one can obtain with credit... all those shiny things will still be around after you get mortgaged.

Re: Specifically how does applying for new credit prior to mortgage application affect approvability

Anonymous — Sun, 12 Feb 2017 21:41:46 GMT

I hope you find some helpful info here @lakr58. Not sure how it relates to mortgage approval significantly, but I feel like I've read that the most significant impact of an inquiry can wear off as soon as 6 months. Did your score go up as a result of the new credit card because of increased credit limit?

Thanks for your replay @Revelate!

> mortgage >>>> any credit card, it's not even really comparable honestly. Focus on the prize.

Yes I totally understand and agree, but unfortunately it's not that simple. There are competing concerns.

> Revolving utilization is instant in time, so yes if your lenders report your now pretty utilization, you can go shopping. Leaving points and therefore often money on the table if you aren't as clean as possible (up till 740/760 anyway).

I know the effect on credit score is instant (I just saw my scores increase 25 points in one month because of decreasing my credit card utilization a bit), but a mortgage lender won't look at your report to see what your utilization was in preceding months? (FWIW I think I could get in 740-760 if I just paid off the balance on one of my cards right now.)

> What UW thinks is up to the individual UW in many cases unfortunately; for me I had to explain any inquiries within the recent 4 months

Thanks! That's good to know.

> though getting a personal loan to consolidate credit card balances can be a win both from a FICO and DTI perspective, but just be prepared to explain it

So you think they wouldn't have a problem with it if it's explained as being used to pay off a credit card balance to reduce interest owed?

> certainly 2 months out I'd be sitting on my hands unless my car up and died and I had to replace it

> 6+ months out and if someone is on a bubble (especially on EX), maybe it makes sense to tweak one's file a bit or if one is truly a thin file, but in general, just chase the goal of a mortgage and ignore the other shiny things one can obtain with credit... all those shiny things will still be around after you get mortgaged.

So, I'm guessing my situation is not very typical. I'm currently between cars and would like to buy a used one ASAP (though I can work without one). That's the "shiniest" thing I'm interested in buying before getting a mortgage, and I only want a modest one (I'd be almost thrilled to drive off in a Hyundai). But due to factors including the state of the economy and state and federal government policies, even modest cars are pretty ludicrously expensive, and few and far between on the private market, further driving up the cost.

Competing factors are that I need to save as much as possible toward down payment and other savings necessary to purchase a home, but I'd also like to buy a car and pay off a credit card balance at lower interest. I _need_ to reduce the credit card balance to lift my score.

If the credit system worked in a more rational and less arbitrary way, the most financially sensible things for me to do would be to get a new credit card with balance transfer offer or a low interest personal loan and pay off the credit card, and get an auto loan and buy a car. (Though if the credit system worked differently who knows what my score would be now -- the silver lining is that it's pretty good right now.)

If I did that I'd still have a fine debt to income ratio and I'd keep much more money in the bank for down payment, etc. On the other hand, paying off the credit card and or buying a car with cash would put a significant dent / delay in the savings I need to buy a home. Even though my debt to income ratio is fine right now I also can't just continue to carry the credit card balance until after getting a mortgage because the utilization is dragging my score down into the "good" range. I'd ask my credit card company for a limit increase just to improve that situation except I'm guessing they wouldn't give me one without having lower utilization -- classic catch-22, chicken and egg scenario.

I believe my file qualifies as thin: 5 total accounts (including 2 closed installment), 2 (both revolving) open. On the other hand I have decent age of oldest account and average age of accounts.

Re: Specifically how does applying for new credit prior to mortgage application affect approvability

Anonymous — Sun, 12 Feb 2017 22:05:32 GMT

My scores are about the same as they were before(maybe a bit higher) I got the new credit card. But during that same time I had a CO that finally fell off after 7 long years. So Im not really sure the affect of the new account.

Re: Specifically how does applying for new credit prior to mortgage application affect approvability

Anonymous — Sun, 12 Feb 2017 22:44:27 GMT

@Anonymous wrote:
I've read that it's not a good idea to apply for credit cards or loans within as much as 12-24 months of applying for a mortgage. I understand that in the short term credit score could suffer as a result (due to the inquiry, decrease in average age of accounts, whatever), but with such a long buffer recommended it makes me wonder if there are additional reasons.

Is that recommended solely because of the possible impact on credit score? Or are there other reasons? Will a mortgage lender look at your credit report and penalize you for "recent" inquiries or new accounts?

FWIW I'm fortunate to have good credit scores right now and further fortunate that I can probably pretty easily get them into the excellent range by decreasing credit card utilization. My preferred way of doing that would be to open a new credit card (FWIW I only have one personal card currently) with a good balance transfer offer, or take out a low interest personal loan (I can even get a secured loan that doesn't require a hard inquiry). I'd then charge purchases to my current card and pay it in full each month while paying down the balance of the new account.

But, I don't want to do anything that would jeopardize ability to get approved for a mortgage anytime soon (let's say as soon as 2 months). I think credit card utilization / low total limits are the main things suppressing my score and I'm guessing either of those approaches would probably result in a substantial immediate net gain in my credit score (the generic ones anyway -- not sure about the mortgage ones) due to immediately reducing the credit card utilization (in one case by gaining additional total credit [and I'd anticipate the limit on my current card increasing when the util dropped sufficiently too], and in the other by reducing the utilization to zero). And I'd only expect the situation to improve from there as I currently have a low number of accounts and no current installment loans.

For that matter, how long does my utilization need to be squared away for before applying for a mortage? Let's say it's unacceptably high now and I paid it in full before the next due date and the credit card company reports that to the credit bureaus 3 days later. Would I then be good to go to apply for a mortage (as far as that issue is concerned), or will they look back at previous utilization, requiring me to keep it acceptably low for some particular amount of time?

Aside from impact on score, would a mortgage lender be likely to look at new credit in the form of credit card / personal loan / auto loan any differently? I believe I have read that they frown upon getting a new credit card and starting to accumulate a balance.

Thanks!

If you don't HAVE to ...and I do mean...HAVE to.... then do not apply for new credit if you intend to get a mortgage in the next year. Here's why.

This past Oct, I was thinking about applying for mortgage a year from then (meaning Oct. 2017). My fico 8 score were so-so and I was fairly new to this forum as well. I sought some advice and got good advice. Infact, SouthJamaican specifically advised - don't get new cards. Wish I had listened or atleast had paid closer attention to the movement of my mortgage fico scores at that time. Turns out, I was closer to my MMS goal than I am right now. Although it will likely work out in the end for me since I moved my mortgage app time out a few months to have more time to save for a down payment, I should have left well enough alone.

Though YMMV, I believe it is highly likely that your mortgage scores will take a harder hit when you apply for new credit than your fico 8 score. Further more, I am already watching this live with my own fico mortgage scores (since I already made the mistake). Also, it very well may take longer for your mortgage scores to recover from the score drop than your fico 8 scores. Infact, my fico 8 scores have already recovered quiet nicely, but I suspect it will take a better part of this year to get my mortgage scores back to where they were in Oct 2016 when in truth, I should be using this time making my profile stronger, not making up lost ground.

If you MUST take on new credit, implement every trick in the book that you know to maximize your fico scores (only one card reporting a small balance with all other cards reporting zero, pif and ontime every month,etc. etc.) so you can see the real impact on your mortgage scores waaaay before mortgage app time. I wish you all the best.

Re: Specifically how does applying for new credit prior to mortgage application affect approvability

Anonymous — Sun, 12 Feb 2017 23:47:59 GMT

@Anonymous wrote:
@Anonymous wrote:
I've read that it's not a good idea to apply for credit cards or loans within as much as 12-24 months of applying for a mortgage. I understand that in the short term credit score could suffer as a result (due to the inquiry, decrease in average age of accounts, whatever), but with such a long buffer recommended it makes me wonder if there are additional reasons.

Is that recommended solely because of the possible impact on credit score? Or are there other reasons? Will a mortgage lender look at your credit report and penalize you for "recent" inquiries or new accounts?

FWIW I'm fortunate to have good credit scores right now and further fortunate that I can probably pretty easily get them into the excellent range by decreasing credit card utilization. My preferred way of doing that would be to open a new credit card (FWIW I only have one personal card currently) with a good balance transfer offer, or take out a low interest personal loan (I can even get a secured loan that doesn't require a hard inquiry). I'd then charge purchases to my current card and pay it in full each month while paying down the balance of the new account.

But, I don't want to do anything that would jeopardize ability to get approved for a mortgage anytime soon (let's say as soon as 2 months). I think credit card utilization / low total limits are the main things suppressing my score and I'm guessing either of those approaches would probably result in a substantial immediate net gain in my credit score (the generic ones anyway -- not sure about the mortgage ones) due to immediately reducing the credit card utilization (in one case by gaining additional total credit [and I'd anticipate the limit on my current card increasing when the util dropped sufficiently too], and in the other by reducing the utilization to zero). And I'd only expect the situation to improve from there as I currently have a low number of accounts and no current installment loans.

For that matter, how long does my utilization need to be squared away for before applying for a mortage? Let's say it's unacceptably high now and I paid it in full before the next due date and the credit card company reports that to the credit bureaus 3 days later. Would I then be good to go to apply for a mortage (as far as that issue is concerned), or will they look back at previous utilization, requiring me to keep it acceptably low for some particular amount of time?

Aside from impact on score, would a mortgage lender be likely to look at new credit in the form of credit card / personal loan / auto loan any differently? I believe I have read that they frown upon getting a new credit card and starting to accumulate a balance.

Thanks!
If you don't HAVE to ...and I do mean...HAVE to.... then do not apply for new credit if you intend to get a mortgage in the next year. Here's why.

This past Oct, I was thinking about applying for mortgage a year from then (meaning Oct. 2017). My fico 8 score were so-so and I was fairly new to this forum as well. I sought some advice and got good advice. Infact, SouthJamaican specifically advised - don't get new cards. Wish I had listened or atleast had paid closer attention to the movement of my mortgage fico scores at that time. Turns out, I was closer to my MMS goal than I am right now. Although it will likely work out in the end for me since I moved my mortgage app time out a few months to have more time to save for a down payment, I should have left well enough alone.

Though YMMV, I believe it is highly likely that your mortgage scores will take a harder hit when you apply for new credit than your fico 8 score. Further more, I am already watching this live with my own fico mortgage scores (since I already made the mistake). Also, it very well may take longer for your mortgage scores to recover from the score drop than your fico 8 scores. Infact, my fico 8 scores have already recovered quiet nicely, but I suspect it will take a better part of this year to get my mortgage scores back to where they were in Oct 2016 when in truth, I should be using this time making my profile stronger, not making up lost ground.

If you MUST take on new credit, implement every trick in the book that you know to maximize your fico scores (only one card reporting a small balance with all other cards reporting zero, pif and ontime every month,etc. etc.) so you can see the real impact on your mortgage scores waaaay before mortgage app time. I wish you all the best.

Just to provide some data from my own profile (ofcourse, YMMV)....

Recently, my fico 8 scores increased as follows: EQ: +35pts TU +32 pts EX: +32 pts

But my mortgage scores did not move nearly as much: EQ: +0 TU: +4 EX: +14pts

One would think (or in my case, hope) to see ATLEAST half of the fico 8 point increases also reflected in the mortgage scores but ...nope. My best profile (EX) barely got half which didnt help my MMS at all. So do be careful in the assumptions and hopes that you make - especially this close to mortgage app time.

Re: Specifically how does applying for new credit prior to mortgage application affect approvability

Revelate — Mon, 13 Feb 2017 01:26:57 GMT

@Anonymous wrote:
@I hope you find some helpful info here @Anonymous. Not sure how it relates to mortgage approval significantly, but I feel like I've read that the most significant impact of an inquiry can wear off as soon as 6 months. Did your score go up as a result of the new credit card because of increased credit limit?

@Anonymous for your replay @Revelate!

> mortgage >>>> any credit card, it's not even really comparable honestly. Focus on the prize.

Yes I totally understand and agree, but unfortunately it's not that simple. There are competing concerns.

> Revolving utilization is instant in time, so yes if your lenders report your now pretty utilization, you can go shopping. Leaving points and therefore often money on the table if you aren't as clean as possible (up till 740/760 anyway).

I know the effect on credit score is instant (I just saw my scores increase 25 points in one month because of decreasing my credit card utilization a bit), but a mortgage lender won't look at your report to see what your utilization was in preceding months? (FWIW I think I could get in 740-760 if I just paid off the balance on one of my cards right now.)

> What UW thinks is up to the individual UW in many cases unfortunately; for me I had to explain any inquiries within the recent 4 months

Thanks! That's good to know.

> though getting a personal loan to consolidate credit card balances can be a win both from a FICO and DTI perspective, but just be prepared to explain it

So you think they wouldn't have a problem with it if it's explained as being used to pay off a credit card balance to reduce interest owed?

> certainly 2 months out I'd be sitting on my hands unless my car up and died and I had to replace it

> 6+ months out and if someone is on a bubble (especially on EX), maybe it makes sense to tweak one's file a bit or if one is truly a thin file, but in general, just chase the goal of a mortgage and ignore the other shiny things one can obtain with credit... all those shiny things will still be around after you get mortgaged.

So, I'm guessing my situation is not very typical. I'm currently between cars and would like to buy a used one ASAP (though I can work without one). That's the "shiniest" thing I'm interested in buying before getting a mortgage, and I only want a modest one (I'd be almost thrilled to drive off in a Hyundai). But due to factors including the state of the economy and state and federal government policies, even modest cars are pretty ludicrously expensive, and few and far between on the private market, further driving up the cost.

Competing factors are that I need to save as much as possible toward down payment and other savings necessary to purchase a home, but I'd also like to buy a car and pay off a credit card balance at lower interest. I _need_ to reduce the credit card balance to lift my score.

If the credit system worked in a more rational and less arbitrary way, the most financially sensible things for me to do would be to get a new credit card with balance transfer offer or a low interest personal loan and pay off the credit card, and get an auto loan and buy a car. (Though if the credit system worked differently who knows what my score would be now -- the silver lining is that it's pretty good right now.)

If I did that I'd still have a fine debt to income ratio and I'd keep much more money in the bank for down payment, etc. On the other hand, paying off the credit card and or buying a car with cash would put a significant dent / delay in the savings I need to buy a home. Even though my debt to income ratio is fine right now I also can't just continue to carry the credit card balance until after getting a mortgage because the utilization is dragging my score down into the "good" range. I'd ask my credit card company for a limit increase just to improve that situation except I'm guessing they wouldn't give me one without having lower utilization -- classic catch-22, chicken and egg scenario.

I believe my file qualifies as thin: 5 total accounts (including 2 closed installment), 2 (both revolving) open. On the other hand I have decent age of oldest account and average age of accounts.

Not really regarding thin file, sure it's handy to have a few more open revolvers as we've seen some squirrley results trying to optimize revolving utilization on 2 accounts, but 5 total accounts is above everyone's definition of thin.

Inquiries are full monty, the information that they lose most of their sting has never been supported with datapoints from what I've seen, and I did get the opportunity during my own mortgage process to stringently test it. Most people don't get frequent enough datapoints in a short enough time period to really determine what's what, lots of idiosyncratic up and downs unless you're flatlined like my EQ FICO 5 has been for years and therefore able to pick out the inquiry changes explicitly.

The two big salient questions I have reading your post: what are the current balance / credit limit, on both cards? Secondly how much will it cost to go sans car through the mortgage and then sort that afterwards?

I guess there's a pair more, how much money do you have currently, and what amount of house were you looking to buy?

Re: Specifically how does applying for new credit prior to mortgage application affect approvability

Anonymous — Mon, 13 Feb 2017 01:59:17 GMT

@Anonymous wrote:
Just to provide some data from my own profile (ofcourse, YMMV)....

Recently, my fico 8 scores increased as follows: EQ: +35pts TU +32 pts EX: +32 pts
But my mortgage scores did not move nearly as much: EQ: +0 TU: +4 EX: +14pts

One would think (or in my case, hope) to see ATLEAST half of the fico 8 point increases also reflected in the mortgage scores but ...nope. My best profile (EX) barely got half which didnt help my MMS at all. So do be careful in the assumptions and hopes that you make - especially this close to mortgage app time.

What lead to that increase and what was the timeline? Because of the spike in FICO 2, I'm going to guess that it was the addition of an installment loan over a month or two.

Re: Specifically how does applying for new credit prior to mortgage application affect approvability

Anonymous — Mon, 13 Feb 2017 04:22:15 GMT

@Anonymous wrote:
@Anonymous wrote:
Just to provide some data from my own profile (ofcourse, YMMV)....

Recently, my fico 8 scores increased as follows: EQ: +35pts TU +32 pts EX: +32 pts
But my mortgage scores did not move nearly as much: EQ: +0 TU: +4 EX: +14pts

One would think (or in my case, hope) to see ATLEAST half of the fico 8 point increases also reflected in the mortgage scores but ...nope. My best profile (EX) barely got half which didnt help my MMS at all. So do be careful in the assumptions and hopes that you make - especially this close to mortgage app time.
What lead to that increase and what was the timeline? Because of the spike in FICO 2, I'm going to guess that it was the addition of an installment loan over a month or two.

Good guess! But to prevent getting off topic and derailing the OP question, you can read all about what lead to the increase here...and maybe shed some light into the why.