How to Improve Your Credit Score to Buy a House

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Your credit score has an enormous impact on almost every aspect of home buying. It can determine if you’re approved for a home loan, the mortgage rates you’ll pay and whether you’ll be able to borrow the amount you need for the house you want.

This means that, if your credit is in the fair to low range, it's a good idea to improve it before applying. Read on for some tips on how to improve your credit score before buying a house.

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What credit score is needed to buy a house?

First, it’s important to know the credit score needed to qualify for a mortgage.

Most lenders require at least a 620 FICO score for approval; many will ask for credit scores higher than 700. (While there are two credit scoring models — FICO and VantageScore — most lenders use the FICO model.)

There are some exceptions, however. Certain government-backed loans, such as VA and FHA loans, tend to have more lenient requirements and will consider borrowers with credit scores as low as 500.

It’s worth noting that your potential lender will evaluate a variety of factors aside from your credit score. They’ll analyze your income stability, employment and the details of your credit history, including your debt-to-income ratio, credit availability and your past payment history. They will pay special attention to similar loans — for example, if you had a recent foreclosure or were late on mortgage payments, lenders will probably take note.

How to improve your credit score to buy a house

As we said above, banks assess a variety of factors when evaluating your application; however, a great credit score will definitely help increase your chances of approval.

These are some of the steps you can take to improve your score before you buy a house.

Check your credit report

The first step to fixing your credit is knowing exactly where you stand.

You can request copies of your credit reports from all three major credit bureaus — Equifax, TransUnion and Experian — through Annualcreditreport.com. (Despite the name, you are entitled to a copy of your credit report every week.)

Once you have your reports, check them carefully, looking for any accounts that might not belong to you, incorrectly reported payments or older information that should have dropped off your report.

(By law, most negative information will stay in your credit report for only seven years — with the exception of a Chapter 7 bankruptcy or unpaid tax liens, both of which can be reported for 10.)

If you do find mistakes in your report, you should dispute it with the bureau that reported it. By law, the bureaus are required to investigate and resolve the case within 30 days.

But, if you’re aiming to improve your score, don’t just focus on the negative marks. You should also ensure that your accounts in good standing are being reported in all three reports — an important step since you can’t know beforehand which bureaus your lender will pull your credit from.

Some smaller lenders will only report to one or two of the bureaus, but not three. If you have accounts with a history of on-time payments, and they’re not being reflected in all three reports, contact your lender and see if they can start reporting it.

Address your outstanding debt

Payment history is the factor that most impacts your credit score and, in order to improve it, it’s essential that you pay all your bills on time.

If you have late payments, make them as soon as you can to avoid further delinquency. It’s best to handle these bills while still with the original creditor, before it is sold to a debt collection agency.

However, if the debt has already been sold to a collection agency, there are a few considerations to take into account before you pay. Most states have statutes of limitations when it comes to debt collection — if a debt is past the statute of limitations and you make a payment on it, you’re essentially restarting the clock. Check your state laws on the matter before you start making payments on a debt in collections.

However, even if the debt is past the statute of limitations, make sure to address and discuss it with your creditor. Additionally, if you have multiple accounts in collections, it’s a good idea to consult a credit counselor or a credit repair company.

Pay down credit card debt

Another of the most significant factors impacting your credit score is the credit utilization ratio, a percentage that indicates how much of your available credit you’re using.

Most lenders like to see a credit utilization ratio below 30%. So, let’s say you have a single card with a credit limit of $5,000, and you’re carrying a balance of $2,500 — that would mean you’re using 50% of your available credit. Bringing the balance down could help your credit score.

Before you start applying for mortgages, it’s a good idea to start making higher monthly payments on your cards and pay down the debt as much as you can. (Check out our article on 5 Popular Strategies People Are Using to Escape Credit Card Debt if you need ideas on how to do that.)

Keep older credit lines open

While it’s best practice to pay down your credit card balances, it’s a good idea to keep those credit lines open. Closing older accounts can impact your credit in a couple of ways.

For one they could reduce your credit age, that is, the average length of time your accounts have been open. This accounts for 15% of your FICO score.

This means that paying off older accounts completely — such as student loans and auto loans — could temporarily make your score drop as it can affect both your credit age and your credit mix, which accounts for 10% of your score. While it’s definitely advisable to pay off those loans if you’re in a position to do so, be advised that it’s pretty common to see your score drop right after.

Additionally, if you close down credit card accounts you’d reduce your amount of available credit which, as we said before, could also impact your score in a negative way.

Avoid applying for new credit

If you’ve found the home of your dreams and you’re ready to start the home buying process, it’s time to stop applying for other types of credit.

Applications for credit — including personal loans, new credit cards, auto loans — all require a hard inquiry into your credit, which can slightly lower your score.

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Lexington Law Firm services are unavailable in Oregon.

How to improve your credit score to buy a house FAQs

Can you buy a house with no credit?

You can — if you can afford to pay for the house in cash. If you don’t have the cash and you have a low credit score (or a brief credit history), you’ll have to build credit and apply for a mortgage loan. There are several things you could do to build your credit history. You could start by applying for a secured card, a type of credit card that requires a security deposit and so has more lenient eligibility requirements. You could also try a credit-builder loan. These types of loans, instead of giving you an amount of money up front, deposit the money and only release it once you’ve made payments. During that time, you get the opportunity to build a history of on-time payments with the credit bureaus.

What is a good credit score to buy a house?