Whether it’s about having a place to call your own, needing space to raise a family, or wanting to customize your living space, buying a house is an important milestone. Making this dream a reality takes a lot of preparation, including getting your finances straight.
Here are some tips and tricks that you can use to improve your credit score to help you buy a house.
Credit score and homebuying: the relationship
Buying a new home can be an incredibly confusing process to navigate, especially for first-time homebuyers. Figuring out exactly how to buy a new home and what it means to become a homeowner is no easy task.
Perhaps the most important element that affects your ability to buy a home is your credit score. Your credit score not only plays a part in determining how large of a loan you can take out, but it also determines your mortgage rates and terms.
Your credit score is a reflection of your overall creditworthiness, which describes how much banks and credit lenders trust you to pay back money that they loan you, plus the interest.
You have more than one credit score, each calculated separately by the different major credit bureaus: Equifax, TransUnion, and Experian. You can also have a FICO score and a VantageScore. While each score is different, they all use a combination of the same information to calculate your score, meaning they are usually very similar.
What does your credit score have to do with buying real estate? Unless you happen to have a lot of cash on hand, you probably can’t afford to pay out of pocket for a home, nor would you usually want to.
Instead, people typically pay a down payment and then borrow the rest of the money they need from a bank or mortgage lender. If you have a high credit score, you’ll typically be offered better credit terms and rates, as well as larger loans.
What you can do to improve your credit score?
So, you’ve found the home of your dreams and you have your eye on a loan with great terms and rates — the only thing between you and the joys of homeownership might be your credit report.
Here are a few tips to help you raise your credit score if you plan on buying a house in the near future.
1. Pay all your bills on time
Paying off your debts on time is an essential part of achieving a good credit score. Late payments can swiftly have negative impacts on your credit score, so it’s important to be up-to-date and conscientious with payments, even in the midst of how busy it gets looking for a home.
The biggest factor in your score is your payment history, so do your best to make on-time payments. It might seem like a large undertaking now, but reducing debt and owning a home will likely make your efforts worth your while.
2. Keep all credit accounts open
One fundamental way to quickly boost your credit score is to keep all of your open credit accounts active. Even if you do not use them regularly, having multiple active and open accounts increases the length of credit history and demonstrates a healthy usage of credit.
The total number of credit accounts you have reflects how often lenders have found you trustworthy, so it’s generally a good practice to keep accounts open even if you don’t use them anymore. Keeping an eye on these small details can have a big impact when it comes time to make your purchase.
While keeping all of your credit card accounts open is important, it’s also important to consider your credit mix. Incorporating a few different types of credit into your portfolio, such as credit cards and personal loans, can also help raise your score.
3. Keep your credit utilization low
Another simple but powerful action you can take is to keep your credit utilization ratio low. This means that if you have multiple lines of credit, like a credit card and personal loan, try to make sure that your total debts remain below 30 percent or even 20 percent of the available credit limit.
You can do this by cutting your spending or simply by paying off your balances more frequently to keep your balance lower.
If you have particularly bad credit, you can also ask a family member to add you as an authorized user to their own credit line. This can help you take advantage of your family member’s personal finance practices to help raise your own credit. Just remember — if you become an authorized user on your family member’s account, your payment behavior will affect her or his credit as well as yours.
You can also lower your utilization by requesting a credit line increase from your credit card issuer. If you consistently make your monthly payments and monitor your credit card balances, your credit card company may approve your request.
4. Don’t apply for other loans
One of the best ways to maintain your credit score before applying for a home loan is by avoiding any applications for other loans or lines of credit right before applying.
Remember that applying for new credit can cause hard inquiries, which can lower your credit score and potentially hurt your chances of qualifying for a loan. If you are planning to purchase a home, avoid opening new credit cards or taking out any new loans in the two to three months before your purchase.
5. Use Experian Boost
Experian Boost can be an excellent tool for anyone looking to improve their credit. With Experian Boost, you can have utility, phone, and streaming service payments count toward your credit report.
This means that these payments can help increase your score in real time. As financial transactions are monitored and added to your credit report, those with good payment histories will likely see their Experian Credit Scores increase accordingly.
Overall, Experian Boost allows users to turn good payment history into better access to more home financing options. However, keep in mind that Experian Boost is not guaranteed to improve your credit score, and any improvements you see will only apply to your Experian credit score.
6. Monitor your credit reports for fraud or errors
The final thing that you should do to maintain your credit score before buying a home is regularly monitor your credit report for any potential fraud or errors that may be affecting your score. It’s wise to stay ahead of the game and verify that the data reflected in your credit reports are accurate.
Additionally, be sure to stay vigilant against potential fraudulent activity being reported under your name, and investigate anything suspicious you may notice. With proper care, you can watch for false information that could potentially limit opportunities for future loans or mortgages.
You can access a free credit report through any of the three credit reporting agencies. These bureaus will conduct soft credit inquiries to help you stay on top of your credit score without damaging it. While there are many different credit scoring models, the FICO score is the most commonly used among lenders.
Homebuying and credit: frequently asked questions
Increasing your credit score is just the tip of the iceberg when it comes to buying a home. Here are a few of the most common questions people ask about homebuying and their credit.
Do you need good credit to buy a house?
The question of whether you need good credit to buy a house is quite nuanced. The answer could be either yes or no, depending on what kind of loan or mortgage program you’re looking at.
Generally speaking, having good credit will open up more options when it comes to loan programs and terms available. Plus, you may end up with a lower rate if you’ve got great credit.
However, not everyone has excellent credit. Fortunately, there are many home loan programs available for those with average credit.
For example, FHA loans, USDA loans, and other conventional loans can help those who may not meet rigorous credit score requirements. If you qualify for them, VA loans (i.e. loans for veterans and their family members) are another great resource for those with lower credit scores.
So, how do you know which loan is best for you? As a general best practice, you should always conduct proper research before jumping into a financial commitment. You may even want to consult a professional financial advisor to make sure you understand all the pros and cons associated with each option.
Do you have to take a mortgage for the maximum you qualify for?
Taking out a mortgage is an important decision with long-term consequences. It’s natural to be tempted by the maximum amount that a lender will approve. After all, more money will mean more options.
However, there’s a lot to consider before deciding on the right loan amount. It’s important to understand how much you can comfortably pay each month without overextending yourself financially.
Taking out too much could impact future financial goals like saving for retirement or making other investments. Rather than automatically choosing the highest approved option, assess your current income and expenses and make sure you factor in unexpected costs like repairs and home improvement projects so you can feel confident taking on a mortgage that fits your budget.
Why is mortgage interest rate important?
Mortgage interest rate is a critically important factor for homebuyers. It affects how much money the borrower must pay to take out a loan and can significantly impact the affordability of their house payments. Even a small difference in percentage points can add up to thousands of dollars over decades of loan repayment.
With this in mind, it’s essential that buyers research lenders so they can find a mortgage rate that fits within their budget long-term. Shopping around is key to finding the right mortgage product at the best rate possible!
Homebuying and credit: the takeaways
When you buy a home, your credit score will impact everything from the interest rate on your mortgage to how much money you’re approved to borrow. Making sure your credit score is as high as possible can help you secure better financial terms on your home purchase.
If you are looking to build your credit with a new credit card, consider Vital Card. Vital rewards you for sharing and spending responsibly with cash rewards.
As you and your network continue to display smart financial habits, you can track your Vital Score in real time.
Visit our website to see how Vital Card can help you with your financial health.
Sources
Buying a home? The first step is to check your credit | Consumer Finance Protection Bureau
Q&A: What is Credit Utilization? | Credit.org
What Credit Score Do I Need to Buy a House? | Experian
Vital Card blog posts are intended for informational purposes only and should not be considered financial or any other type of advice.