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<\/figure>\n\n\n\nBefore we get into the why<\/em>, let\u2019s make sure we understand what<\/em> a credit score is telling lenders. A credit score is a number (typically between 300 and 850, according to the Federal Trade Commission<\/a>) designed to summarize your risk level as a borrower, i.e., how likely you are to repay your debts. Lenders use it as a factor in deciding whether to lend you money, under what terms (interest rate, fees, etc.), and with what conditions. There are different scoring systems for determining a credit score, but most lenders use the FICO system<\/a>.<\/p>\n\n\n\n FICO scores typically include the following factors:<\/p>\n\n\n\n Now that we\u2019ve established the key components of a credit score and why that number matters, let\u2019s explore some of the most frequent causes of a score drop. Some of the reasons may seem insignificant or innocuous, but it\u2019s important to view them all as pieces of a bigger picture, one that can influence your likelihood of receiving a home loan.<\/p>\n\n\n\n In the FICO scoring system, payment history makes up 35% of the total score. With this in mind, late or missed payments are common causes of a decreased score. According to myFICO.com<\/a>, \u201cresearch shows that your track record of payment tends to be the strongest predictor of the likelihood that you\u2019ll pay all debts as agreed to.\u201d The later your payments are (and the more late payments you make), the greater the impact on your score might be.<\/p>\n\n\n\n Why this matters for homebuyers:<\/strong> What you can do to resolve or prevent it:<\/strong><\/p>\n\n\n\n If the balances on your credit cards are steadily creeping toward the limits and you don\u2019t pay them down by the time the issuers report to the credit bureaus, you could see your credit utilization percentage spike and your overall score decline. As mentioned earlier, the recommended maximum utilization is 30% of your available credit.<\/p>\n\n\n\n Why this matters for homebuyers:<\/strong> What you can do to resolve or prevent it:<\/strong><\/p>\n\n\n\n Speaking of hard inquiries, when you apply for a new line of credit, the lender will typically \u201cinquire\u201d into your credit report, which can ding your score by a few points. Additionally, opening a brand-new account can lower the average age of your total accounts, leading to a drop in your score.<\/p>\n\n\n\n Why this matters for homebuyers:<\/strong> What you can do to resolve or prevent it:<\/strong><\/p>\n\n\n\n On the flip side, a closed account or a decreased credit limit on an existing card can negatively impact your score. Both of these scenarios can lower your total available credit, and a closed account can impact both your average age of credit history and your credit mix. Additionally, while paying off an installment account (think auto or student loans) is certainly something to celebrate in the long run, it\u2019s important to remember that this action could cause a temporary dip in your score by changing your credit mix, average account age, and available credit.<\/p>\n\n\n\n Why this matters for homebuyers:<\/strong> What you can do to resolve or prevent it:<\/strong><\/p>\n\n\n\n A derogatory item on your credit report \u201ctypically indicates a serious delinquency or late payments\u201d and can \u201crepresent significant credit risk to lenders,\u201d according to Experian<\/a>. Derogatory marks include bankruptcy, charged off accounts (which happens when a creditor gives up on collecting an unpaid debt), a collections account, etc., and can severely impact your credit score.<\/p>\n\n\n\n Why this matters for homebuyers:<\/strong> What you can do to resolve or prevent it:<\/strong><\/p>\n\n\n\n Sometimes the answer to \u201cWhy did my credit score drop?\u201d may be as simple as an error in your credit profile. Accounts you don\u2019t recognize, incorrect entries, identity theft, all of these mistakes can drag your score down unexpectedly.<\/p>\n\n\n\n Why this matters for homebuyers:<\/strong> What you can do to resolve or prevent it:<\/strong><\/p>\n\n\n\n When you\u2019re planning to buy a home, timing is everything in terms of your credit profile. Mortgage lenders will typically review your credit report at multiple points in the process, including when you apply for the loan and just before the loan closes. Because of this, any unwelcome surprises between application and closing can cause issues, such as a delayed closing, higher interest rate, or even loan denial.<\/p>\n\n\n\n To avoid having to ask, \u201cWhy did my credit score drop?\u201d, it\u2019s helpful to follow a few credit-related best practices:<\/p>\n\n\n\n Buying a home is one of the biggest financial decisions you\u2019ll make, and your credit story plays a major role in how that decision might go. A drop in your credit score can feel like a setback, but your response to that change can turn a potential catastrophe into just a small bump in the road. When you understand the why<\/strong> behind \u201cWhy did my credit score drop?\u201d, you can take intentional steps to correct it and prevent the same issue from happening in the future.<\/p>\n\n\n\n Take a peek at our Homeward\u2122 blog<\/a> for other articles on managing your credit score during the homebuying process.<\/p>\n\n\n\n\n
What are the most common reason for a score to drop?<\/h2>\n\n\n\n
Late or Missed Payments<\/h2>\n\n\n\n
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When you apply for a mortgage, your lender will pull your credit report and see any late payments. A recent 30-day (or more) late payment may raise concerns regarding your risk level and could lead to higher interest rates or additional conditions. It might even jeopardize your loan approval.<\/p>\n\n\n\n\n
Increase in credit utilization<\/h2>\n\n\n\n
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During the application process, mortgage companies will look at your debt-to-income ratio and your recent credit behavior. If your utilization jumped recently, this could signal potential risk or financial instability. Even if you\u2019re planning to pay off the balance, the timing matters\u2014lenders may pull your credit report again closer to closing day.<\/p>\n\n\n\n\n
A new credit application or hard inquiry<\/h2>\n\n\n\n
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If you\u2019re shopping for a mortgage, you\u2019ll want to avoid opening or applying for any new lines of credit until after you close on your new home. While it may be tempting to open a new credit card to purchase furniture or other home items, that hard inquiry and lowered average age of your accounts can cause a score dip that may be detrimental to your loan approval.<\/p>\n\n\n\n\n
Closed account or lowered credit limit<\/h2>\n\n\n\n
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Your credit score isn\u2019t just about what you owe, but rather also about how you appear to manage your credit over an extended period of time. If your profile changes (fewer active accounts, lower limits), lenders may interpret that as less credit history or less available credit cushion, thus reducing your perceived stability. Paying off a large loan could have the positive impact of lowering your debt-to-income ratio, which mortgage companies like to see, but it\u2019s important to time that correctly in order to avoid a decreased score right when you apply for your home loan.<\/p>\n\n\n\n\n
Derogatory marks<\/h2>\n\n\n\n
This is one of the biggest red flags that mortgage underwriters look at. A derogatory mark raises questions about how reliable you are as a borrower and could result in less favorable loan terms or even application rejection. Additionally, a derogatory mark can stay on your credit report for as many as seven to 10 years, so the effects are more long-lasting than others in this article.<\/p>\n\n\n\n\n
A mistake or fraud on your credit report<\/h2>\n\n\n\n
If you\u2019re in the middle of a home purchase and a strange entry appears on your credit report, that could derail your loan approval, at no fault of your own. Underwriters may ask for explanations, and dealing with disputes might delay closing.<\/p>\n\n\n\n\n
Why is the timing of credit behavior important for homebuying?<\/h2>\n\n\n\n
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To wrap it up\u2026<\/h2>\n\n\n\n
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