How Soon Can You Apply for Credit After Closing?
If you recently purchased a home and are thinking about signing up for a credit card, you may be asking how soon can you apply for credit after closing on a new home? Making changes to your credit before closing can derail or delay your closing process, but even after closing it’s important to understand how applying for new credit affects your overall credit history.
Pros and cons of applying for a credit card after a mortgage
Some recent homebuyers may want to apply for a credit card after a mortgage. Home expenses like buying new furniture, redecorating or even making repairs could be a good opportunity to take advantage of a lucrative sign up bonus with a new credit card.
However, it’s generally best practice not to make big purchases when buying a house, as making large charges on your credit cards could increase your overall debt-to-income ratio, and taking out financing could appear as a new credit line on your credit. Still, when it comes to opening a credit card after buying a house, it’s important to weigh the pros and cons.
Pros
You won’t jeopardize your mortgage closing. By waiting to apply for a credit card until after your mortgage loan is finalized, you can ensure that this new application, line of credit and hard inquiry won’t affect the closing process. Any changes to your credit from the beginning of your loan process to the end could result in a rate change or even a denied home loan.
You won’t have to explain the new account to your lender. Typically, lenders will run your credit during the mortgage preapproval process, then run another last minute credit check before closing. If there are new accounts, inquiries or other changes, your lender may delay closing until they can investigate those changes further.
You’ll have a better idea of your needs. Once you’ve closed on your mortgage loan and the house is all yours, you’ll be able to develop a clearer idea of what your new home needs, and what sort of credit card will suit you best. This can make it easier to choose the right card, cash back rewards program and even introductory bonus offer.
You might still be able to “beat” your new mortgage loan to your credit. Even after your mortgage loan has closed, the debt won’t actually appear on your credit report for at least a few weeks. So, if you time it correctly, you’ll better your chances of credit card approval without affecting your loan. While a new credit card application will likely ask for your updated monthly expenses (including your new mortgage payment), that brand new account probably won’t be affecting your credit score just yet.
Cons
You might have a lower credit score now. Following multiple hard inquiries from mortgage lenders and potentially a new mortgage loan account, your credit score may decline a bit after buying a home. Depending on your credit history, this drop could be enough to temporarily disqualify you from certain credit card products.
You can’t use that line of credit for preclosing expenses. Before you close on your new home, there are some big expenses you may be forced to pay. For example, many buyers will need to pay for a home inspection and even a home appraisal, out of their own pockets. If you don’t have the cash on-hand for this, a new credit card could come in handy — but not if you haven’t opened the account yet.
Your debt-to-income ratio will be higher. Before you close on your new home loan, your overall debt-to-income (DTI) ratio will be lower than after you close and have that new debt to your name. This increased DTI and/or monthly expenses ratio could be enough to impact your credit card application and/or new credit limit.
How new credit affects your mortgage approval
Any time you take on new credit, you have the potential to change how your creditworthiness is interpreted. If you’re in the middle of the mortgage approval process, that creditworthiness is absolutely paramount.
Taking out new accounts can affect your new home loan in a few different ways. The first is that you can expect your credit score to drop, just by applying for and opening a new line of credit. That’s because you’ll generally get a new hard inquiry during the application process, and that new credit card will reduce the average age of your accounts.
Things you should know
In addition, about 10% of your FICO credit score is determined by your new credit accounts. While a drop in your credit score is usually temporary in nature, it can (and usually does) reduce your score. Depending on where your score stood previously, this even has the potential to drop you into a new credit rating category. This could cause your lender to raise your interest rate, request a bigger down payment or even deny your loan altogether.
“Some of the most common reasons for denial of a mortgage application are low credit scores and high debt-to-income ratio,” says Mayer Dallal, managing director at mortgage lender MBANC. In addition, he notes that “borrowing more money while you are already in the middle of requesting a huge loan for a mortgage definitely could make you look like you’re heading into ‘maxed out’ territory.”
For this reason, mortgage approval odds are highest if you wait to open new lines of credit until the loan is finalized.
Frequently asked questions
Can I be denied a mortgage after the closing disclosure is issued?
A final closing disclosure is provided to a buyer no less than three days prior to closing on the loan. While this document outlines all of the agreed details of the home mortgage offer, it’s not a done deal until the loan is closed and funded. Due to last-minute financial changes or even the results of a final credit check, a lender can still deny a buyer their mortgage loan even after issuing the closing disclosure.
How long after closing can I apply for credit?
When it comes to opening a credit card after buying a house, there’s no hard and fast rule. If your home loan has been finalized and funded, you may deem it “safe” to apply for a new credit card account.
“After you purchase your new home and close on the mortgage, you can apply for credit as needed,” says Jeanne Kelly, founder at The Kelly Group Coaching. “I even feel it’s good to apply for credit cards or lines of credit when you do not need it; this healthy credit shows that you have accounts with available limits, but low balances and on-time payments.”
Do lenders run credit again before closing?
A lender will typically run your credit at least twice: when you apply for your new loan and just before closing. For this reason, it’s important to not open any new accounts, rack up new debt, close old accounts or make other credit report-related changes prior to closing day. Any unexpected credit changes can result in a delayed or even denied mortgage loan.
How soon after closing can I use my credit card?
If you already have a credit card (or opened a new card shortly after closing on a home mortgage loan) there’s no need to wait before using the account. You can use this credit card for new home purchases or normal daily expenses — just make sure that you are planning ahead for your new monthly mortgage loan payment, and the impact that will have on your budget.
Can I open a new credit card before applying for a mortgage?
New accounts can affect your credit score in a few different ways, so opening a new credit card before applying for a mortgage could be detrimental. A new hard inquiry will cause an initial dip on your credit score, for starters. In addition, a new credit account will cause a drop in your average age of accounts. You’ll also see a decreased score due to the “new credit” FICO category, which counts for about 10% of your score. Then, if you carry a balance on that new account, you’ll also have an increased debt-to-income (DTI) ratio, which lenders factor into their decision process.