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It's not the best time to buy a house. Market conditions in the wake of the COVID-19 pandemic have been difficult, to say the least. But there is one key move you can make that will make the process easier and less costly for you. Here's why you should focus on improving your credit score before you try to buy a home.
What can a higher credit score do for you?
Let's take a closer look at why having a better credit score is a major asset for buying a home.
You'll be seen as lower risk
In short, having a higher credit score indicates to mortgage lenders that you are a lower risk. If you borrow several hundred thousand dollars, a lender is going to worry about the likelihood of you fulfilling the terms of the mortgage. If you have a proven track record of borrowing money and paying it back on time, you'll be rewarded with a higher credit score -- and a lower mortgage rate.
You'll have more loan options
Another reason it's worth boosting your credit score is that it'll give you more flexibility for what loans you can qualify for. Government-backed mortgages, like VA and FHA loans, have lower credit score requirements, but they also have more stringent requirements for appraisals, and some sellers may be more reluctant to entertain offers from buyers using them.
But these loans can help a lot more people buy houses. If you have a credit score of 580, you can get an FHA loan with just 3.5% down. If you can put 10% down, your credit score can be as low as 500.
If you have a credit score of at least 620 , however, you can qualify for a conventional mortgage. These are offered by just about every lender (although credit score requirements for individual lenders vary), giving you far more options.
You may be able to put less money down
If you've got a very high credit score, you might even qualify for a conventional loan with just 3% down. You'll pay for PMI (private mortgage insurance) on a conventional loan with a down payment less than 20%, but being able to put less down can get you into a home faster. This can be especially helpful if you live in an area where home prices are high and saving 20% of the purchase price could take many years.
Rates are up -- but you can still save
The best mortgage rates these days are considerably higher than just a few short years ago, so even if you make the following moves, don't expect to snag a 3% mortgage like you might have in 2021. As of this writing, the current average for a 30-year mortgage is 6.77%. Even with higher rates overall, you can still save with a higher credit score. As you can see here, the difference in your costs with a rate of 7.50% vs. 6.50% is significant:
| Home price and down payment | Rate | Monthly payment (principal and interest) | Total interest paid |
|---|
| $300,000 home, 20% down | 7.50% | $1,678 | $364,126 |
| $300,000 home, 20% down | 6.50% | $1,518 | $306,337 |
Data source: Author's calculations.
A difference of 1 percentage point means saving $160 a month -- and almost $58,000 in total interest. You can plug your own numbers into The Ascent's mortgage calculator to see how much you could save with a lower mortgage rate.
Nothing worth having ever comes easy, and this is true of a mortgage with a competitive rate Thankfully, there's no complicated formula to follow to boost your credit score -- try this:
- Pay your creditors on time: Payment history makes up a whopping 35% of your FICO® Score, and lenders want to know that you'll pay them back if you borrow money.
- Pay down debt if you can: If you have high-interest debt, paying it down will boost your credit score and free up more of your income for the costs of homeownership. Look to increase your income to give yourself the best chance of success here.
- Pull your credit report: You can get yours for free from AnnualCreditReport.com. Look through it for errors, like accounts that show as delinquent but actually aren't. You can dispute them with the credit bureau and have them removed to boost your score.
- Leave your credit profile alone: Other than looking for errors and paying down debt, don't make any other credit moves. Don't apply for new credit cards or loans, and don't close old accounts if you can avoid it. This'll ensure your credit score is in the best shape possible ahead of applying for a mortgage.
The days of 3% mortgages are well and truly behind us. But this doesn't mean you still can't save money on a home loan. Focus on improving your credit score to make it happen.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy .
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