How To Improve your Credit Score Before Buying a House
Buying a house remains a key part of the American dream, but for far too many, it’s a dream that lies tantalizingly out of reach. A lot of factors determine a person’s ability to buy a house, and for better or worse, credit history is one of them. Take these steps to improve your credit score before buying a house.
For many, a good credit score can open the door to homeownership, but for just as many, a low score can close that door. If you’re worried that your credit score might make it hard to secure a mortgage, here’s what you can do to improve your credit score before buying a house.
What Credit Score Do You Need to Buy a House?
Lenders look at your credit history as a guide to how well you’re able to pay off your debts, and will use it to determine whether or not they are willing to offer you a mortgage. A low credit score can cause you to be rejected out of hand, or at the very least prevent you from securing a mortgage with the terms and interest rate that you might want.
A perfect credit score is 850, but anything above 750 is considered excellent and should make it easy to get a mortgage with the best rate. 680 and above is still considered good, but below that level is where things start to get tricky. All lenders have their own particular standards, but somewhere in the low 600s is where most lenders start saying “no.’ If your credit score is in the 500s, you may only be able to qualify for what is known as a subprime loan, with comes with a higher interest rate and a variety of additional fees.
How to Improve Your Credit Score
So, you want to buy a home, but your credit score isn’t doing you any favors. Luckily, there are quite a few steps you can take to improve your credit. Some will take longer than others, but by working hard and managing your debts responsibly, there’s a good chance you can boost your score enough to improve your chances of securing a mortgage.
- Get your credit report. You need to be aware of any problems before you can fix them, so get your hands on an up-to-date copy of your credit report. There are several places online where you can get a free credit report.
- Look for mistakes and get them fixed. Some issues on your credit report may not be your fault. According to Forbes.com, around 25% of people who get declined for a mortgage have errors on their credit report. So go over your report carefully and identify any inaccuracies. If you find any, file a dispute as soon as possible. Equifax and Experian each have online dispute forms, and TransUnion has one that you can fill out and mail in.
- Keep your bills current. At a risk of stating the obvious, paying your bills on time is one of the biggest factors that can improve your credit score. Going from paying one or more bills late each month to paying them all on time could show improvement within a month or two.
- Pay down your balances. Credit utilization, which is a fancy way of saying the amount you can borrow versus the amount of debt you’re carrying, accounts for 30% of your credit score. The more available credit you have, the better position you’re in, so do everything you can to pay off your debts. It’s the fastest and most effective way to boost your credit score.
- Pay above the minimum. Another good way to improve your credit score is to pay more than you have to on your credit card bills. Some lenders may frown on a history of minimum-only payments, so paying above the minimum—even just a little bit more—can make a difference.
- Don’t close out your cards. There’s a bit of debate on this one, but we’re of the opinion that it’s better to be safe than sorry. By all means pay off your credit cards, but don’t close out the accounts prior to applying for a mortgage. Doing so could actually hurt your score by causing your credit utilization ratio to go up.
- Avoid big purchases. When applying for a mortgage, you want your credit report to look as clean as possible, so avoid any major changes, like applying for new credit cards or auto loans, or financing another major purchase on credit. Lenders don’t like to see sudden changes just before approving you for a loan.
If you are looking to understand and repair your credit score, check out these Failed Credit Reports: