Having a healthy credit history is essential when you are ready to buy a house. The better your score, the more likely you will be approved for a good home loan. The good news is that there are ways to improve your score, so it’s important to check yours before buying. With South Africans having free access to their credit scores once a year, you really have no excuse not to.
But what happens to your credit score when you buy a house and how will a loan affect it? We have a look at exactly what happens and what you can expect.
Expecting A Bump In Your Credit Score
Your credit score is determined by how well you manage debts in general. A good credit score is from 681 upwards. A financial lender will always first look at your credit score before granting a loan to secure their risk. This means that if you regularly pay your accounts at the right time, you will have better success at getting your loan. The higher your score, the better the loan amount and repayment agreement will be.
How is your credit score affected?
The moment you’re old enough to transact with retailers, banks and other lending institutions, you begin to build your score. This is your financial history at a glance that will fluctuate as time goes by. Not paying outstanding bills on time will lower your credit score, even if you make a double payment later. So will having too much debt, being blacklisted and applying for too many accounts in a short period of time. All of these are things you will need to consider for improvement on your score.
On the positive side, regular and timely payments of your accounts will raise it very effectively. As will responsible management of any and all your accounts. Close all unused accounts and regularly check that your information on your credit score is correct.
What happens to my score when I buy a house?
Every time you apply for any credit, like loans or credit cards, there will be an inquiry on your report. Your home loan application is hugely dependant on a healthy score. But the moment the loan is approved, your score will inevitably take a bit of a knock. This is because there is a rather large loan taken out on your name. Many buyers report a drop of up to 40 points the moment the loan is processed.
But there is no reason to worry about this. Given time and regular and timely repayments on your loan, your score will return to normal in a jiffy. It is, however, important to plan on not applying for any other large accounts or loans though. These will continue to push your score down while you are trying to recover from buying a home. If possible, try to wait until your score has recovered before making any other large financial decisions.
Buying a home is a massive financial decision and can be a wonderful investment. Ultimately, there is nothing to worry about, as long as your credit score is healthy to begin with. It is better to plan well in advance and to make sure your score is as good as possible. That way you will have better success in getting the home of your dreams without any major hiccups.