Tips to Boost Your Credit Score Before Buying a Home
Many first-time homebuyers focus their attention on attending open houses, saving for a down payment, and figuring out if they can afford the home with the Instagram-worthy kitchen in their preferred neighborhood.
However, there is one big thing that many forget to do as they prepare to enter the housing market: Check their credit scores.
That’s important for people who want to buy a home. A higher credit score may help them get a loan and secure a lower mortgage rate. A lower rate can result in lower monthly payments and less interest paid over the life of a loan.
The good news is there are multiple steps that borrowers can take to boost their credit scores.
“The better your credit score is the more doors it opens for you,” said John Cook, the CEO at Premier Credit Builders, a credit education and consulting company.
Your credit score is essentially a snapshot of your financial behavior. Most lenders view it as an indication of how likely you are to pay a loan on time. It helps them to determine how risky of a borrower you are and whether to offer you a mortgage, a credit card, or a car loan.
For example, if you have a credit score of 800 or above, you have what’s considered “excellent” credit. You may be able to get a lower-cost loan than someone with a “good” score of 600 to 739 or a “very good” score of 740 to 799.
About two-thirds of Americans have scores that are “good” or above, according to Experian. It is one of the three large, nationwide consumer reporting agencies along with TransUnion and Equifax.
As of March 2024, the average credit score in the United States was 705, according to Equifax,
Generally, the minimum credit score to qualify for a Conventional Loan is 620. Lenders generally want to see a minimum score of 580 for Federal Housing Administration (FHA) loans, although they may go as low as 500 depending on the size of the down payment and other factors.
Having a clear understanding of the factors that impact a credit score can help potential homebuyers come up with a strategy to boost their scores.
How is your credit score calculated?
Many things that are used to help determine your credit score, according to the Consumer Protection Financial Bureau. These include:
- Your history of paying bills on time
- The amount of outstanding debt you carry
- Your number of outstanding loans and the loan types
- The length of your credit history
- How much of your overall available credit you’re using
- Any new credit applications you have made
- If you’ve ever been sent to debt collection, or experienced foreclosure or bankruptcy
Below are some tips on how to improve your credit score.
1. Check your credit report
Checking your credit score is a critical first step for someone who is considering entering the housing market. Knowing your score can help you improve it.
If you discover an unpaid bill or something else that has hurt your credit, you may be able to reach out to that party and come up with a payment plan. This should help to repair your credit.
The good news is anyone has the right to access their credit report at any time. Under the federal Fair Credit Reporting Act (FCRA), the consumer reporting companies must hand over the information in your report every 12 months if you request it.
You can visit AnnualCreditReport.com to request your credit report from each of the three credit reporting agencies.
It’s not a bad idea to get in the habit of checking your credit report periodically, said Erika Kullberg, an attorney and personal finance expert.
“Minor and major mistakes do happen here, and even a small error can impact your score,” she said.
2. Don't apply for new credit
If you’re planning to enter the housing market, now is not the time to open new credit cards or take out a loan for a car.
That’s because new credit inquiries can temporarily hurt your credit score. That’s the last thing that homebuyers want to do if they are hoping to lock in a lower mortgage rate.
“It’s best to hold off until after you’ve secured your mortgage,” said Kullberg.
3. Reduce your credit utilization
Lenders will be considering how much debt you already have when deciding whether to lend you money to purchase a home. So, before you apply for a mortgage, start by paying off existing debt.
“Reducing your credit utilization ratio can also significantly improve your score,” said Kullberg.
Cook added that while it’s recommended to keep your credit usage to no more than 30% of your total credit limit, he would recommend keeping it under 15% if you’re in the market for a mortgage loan.
4. Pay your bills on time each month
Your payment history is a key factor in how your credit score is built.
“It’s vital to prioritize paying on time and in full,” said Kullberg.
Not carrying a balance on your credit cards can also be cheaper in the long run as you won’t be paying interest on your purchases.
“Don’t settle for minimum payment requirements, as this will still result in large amounts of interest building up and weighing down your score,” said Kullberg.
5. Consider signing up for rent reporting services
California is the only state that requires larger landlords of subsidized housing to give their tenants an option to have their rent payments reported to the major credit agencies. This helps low-income renters build their credit history.
There are services that will report your rent payments to the credit reporting bureaus for a small fee. This may help improve your credit score.
“If this boosts your credit score 20 to 40 points … that [may] help you get a low interest rate,” said Cook.
Take the next step in your path to homeownership with New American Funding.