If you want to buy a home, your credit score is one of many important factors in qualifying for a mortgage, as it can help you show whether you are a reliable borrower or not. However, if your credit score needs to improve, there are many easy ways to raise it.
This Redfin article outlines the steps you can take to improve your credit score before purchasing a home. Whether you’re buying a home in Dallas, Texas, or buying a condo in Milwaukee, Wisconsin, there are ways to modify your credit score.
Key takeout
The minimum credit score for a mortgage ranges from about 500-700 depending on the loan. Traditional loans require a minimum credit score of 620. Paying bills on time, raising credit limits and reducing debt can improve your credit score.
What is a credit score and why is it important when buying a home?
Credit scores are three digits ranging from 300 to 850. This indicates your responsibility when paying your bill. A higher credit score indicates to the lender that you are a responsible borrower and are more likely to pay back what you owe. A low credit score can show your lender that you may be credit risk. Factors that lenders consider include missed payments, excessive extensions in credit lines, adequate credit, or unpredictable spending habits.
Your credit score is determined by a credit report that shows your credit and payment history. There are three major credit bureaus (Equifax, Experian and Transunion) that provide credit scores.
Your credit score is especially important when buying a home. A higher credit score can help you improve your chances of getting a mortgage and potentially improve mortgage terms. If you have a low credit score, you may not qualify for some loan types or have high interest rates.
How to improve your credit score before buying a home
If you need to correct your credit before purchasing your first home, there are a few steps. Let’s take a look at them:
1) Check your credit report
The first step to correcting your credit is to check your credit report for inaccuracy. Get free credit reports from all three credit departments, Equifax, Experian and Transunion at AnnualCredItReport.com. Check each report thoroughly for errors and examine your spending habits. If you notice any errors in the report, please fight directly with your creditor or the bureau.
2) Pay your bills on time
Recording your payments on time is one of the most important factors in determining your credit score. Therefore, this is one of the easiest ways to improve your credit score. You can either have late or missed payments, or have a negative impact on your credit score and stay on your credit report for several years. Keeping up with the minimum monthly payment will help you adjust your credit score.
3) Reduce your debt balance
Your credit usage is the amount you owe the amount you owe by the amount you can use. Usually, it accounts for 30% of your credit score, with the lower the percentage, the better. Credit usage rates above 30% can usually have a negative impact on your credit score. Paying back your balance each month can help reduce this ratio.
4) Increase credit limits
If you typically pay your bills on time each month, but are approaching reaching your credit limit, we recommend considering increasing your credit limit for one of your cards. As long as your spending habits remain the same, this will help reduce your credit usage.
5) Do not apply for a new credit line
It may seem like the right plan to open a new credit line to show you that you are a responsible borrower, but it’s better to avoid this. Opening a line of credit triggers a harsh inquiry when the lender draws your credit report. Strict enquiries will temporarily lower your credit score. If you are looking to improve your credits, it is best to avoid anything that negatively affects your score.
6) Select your target credit score
Setting a credit score goal is a great way to get yourself on track to qualify for a mortgage. The minimum score will change depending on the type of mortgage you qualify for. For example, if you want to qualify for a traditional loan, your minimum credit score is 620.
7) If you have a lot of debt, consider credit counseling
If you have a significant amount of debt and are unsure where to start, consider using a certified credit counseling service. Credit counselors can come up with budgets, payment plans and negotiate on behalf of creditors to help reduce interest rates or monthly payments. Choose non-commercial services to minimize or avoid fees
What is a “good” credit score for a mortgage?
Each type of mortgage has a different credit score requirement, and a high score often improves interest rates and loan terms.
Loan Type Minimum Credit Score Traditional 620 Jumbo 680 – 700 FHA 580 (or down payment of 500 heads)
Credit Score FAQ
What determines your credit score?
There are five factors that determine your credit score, each of which has its own proportions that contribute to the total score.
Payment History: 35%Current Loan and Credit Card Debt: 30%Credit History Length: 15%Number of Accounts: 10%Type Credit: 10%
How long does it take to repair your credits?
On average, it takes 3-6 months, but depends on how much you need to fix your credit. A missed payment or Chapter 13 bankruptcy will depend on what you need to repair, as it can stay in your credit history for seven years.
What is a FICO score?
FICO scores are a type of credit scores produced by the fair Isaac Corporation (FICO). All FICO scores are credit scores, but not all credit scores are FICO scores. All three major credit bureaus (Equifax, Experian and Transunion) offer FICO credit scores.
How do I calculate my credit usage?
For example, there are two credit cards. Card A limit is $3,000 per month, usually spending $2,500, while Card B has $500 per month, and typically spending $50. The total limit is $3,500 and the balance is $2,550.
$2,550/$3,500 = 0.72 x 100 = 72%
What is the debt-to-income ratio (DTI)?
The debt return (DTI) is the monthly obligation divided by the total monthly income. Debts on your credit card or loan are included in these monthly obligations. Lenders can use DTI as one tool to help them determine if they are trustworthy borrowers.
