How to Improve Your Credit Score to Buy a House

If you’re in the market for a new house and plan on applying for a home mortgage, now is the time to get your finances in order— including your credit score.

Your credit score is not just a random three-digit number; it can mean the difference between a mortgage approval or a denial.

Though credit scores may feel shrouded in mystery, there’s a lot you can do to improve your position. We’re here to walk you through how credit scores are calculated, what a good credit score is, and how to improve your credit score to buy a house.

How Credit Scores Are Calculated

If you want to raise your credit score, it’s important to first understand how your score is calculated. This number takes numerous factors into consideration, some of which carry more weight than others.

For example, your FICO score— which is one of the most widely used scoring methods for home mortgages— is calculated using the following formula:

• Payment history (35%): This category evaluates your history of making on-time payments on credit accounts. Late payments, defaults, or collections can negatively impact your score.
• Amounts owed (30%): This considers the debt you owe compared to your available credit limits, known as credit utilization. High utilization can lower your score.
• Length of credit history (15%): This factor looks at the length of time your credit accounts have been open. A longer credit history is good for your score.
• Credit mix (10%): Credit mix considers the various types of credit accounts you have, including revolving credit (like credit cards) and installment loans (like a car loan or mortgage). Lenders like to see a varied credit mix.
• New credit (10%): The new credit category considers recent credit inquiries and new accounts opened. Opening multiple new credit accounts in a short period can be seen as a risk.

Just by better understanding how credit scores are calculated, you can probably already begin to see some ways that you can improve your own credit.

Credit Score Needed to Buy a House

The credit score needed to buy a house can vary depending on the type of mortgage you’re seeking, the lender’s requirements, and other factors.

However, a general guideline is as follows:

• Conventional loans: To qualify for a conventional mortgage with competitive interest rates, a credit score of 620 or higher is often recommended.
• Federal Housing Administration (FHA) loans: FHA loans are more lenient, and borrowers may be approved with credit scores as low as 500, but a down payment of at least 10% may be required for scores below 580. For the standard 3.5% down payment, a score of 580 or higher is typically needed.
• Veterans Affairs (VA) loans: VA loans are available to eligible veterans, and there is no set minimum credit score requirement by the VA. However, individual lenders may have their own credit score requirements, often around 620 or higher.
• United States Department of Agriculture (USDA) loans: USDA loans, designed for rural homebuyers, generally require a minimum credit score of 640 or higher.

A few important nuances here:

• Every lender has different score requirements and standards that they require for mortgage qualification; this is how they manage their organization’s overall risk.
• Keep in mind that while credit score is an important factor, lenders also consider other aspects of your financial situation, such as your income, debt-to-income ratio, employment history, and down payment.
• The credit score you see when you log into platforms like Credit Karma or Experian is not the same score that a lender will see when they pull your information. These scores are great estimates, but every lender uses a different credit score algorithm.

Aim for the Best History

Going after a specific number could make anyone’s head spin. Instead, focus on your history—on-time payments, loans in good standing, credit mix—all of the details we went over in the above section. After all, if every credit score algorithm is different, how could you even begin to guess what number is going to come up when it’s your turn to be approved?

You can think of your credit score as a general estimate of quality, like reviews of a restaurant. Your score is an abbreviated indicator of creditworthiness, a quick way for lenders to look at your history and give recommendations or prequalification.

The score is loosely correlated with your history, so the higher your score, the more confident a lender is that you will repay your loan on time.

Lenders extend the best loan terms to those with better credit history. A lower interest rate can save you thousands of dollars over the life of your loan. On top of this, some lenders may reduce their down payment requirement for borrowers with a demonstrated and documented ability of repayment.

How to Improve Your Credit Score to Buy a House

Improving your credit score is a marathon, not a sprint. While some quick changes may yield immediate results, others take months— or even years— of dedication.

Use the steps below to improve more than just your score—they will improve your overall credit history, documenting your reliability and ability to pay back a loan.

1. Check your credit report.

Start by getting a free copy of your credit report.

This will not only allow you to get a feel for where you stand, but it also gives you the opportunity to check your report for mistakes that could be damaging your score. According to the Federal Trade Commission, an estimated 1 in 5 people in the United States has an error on their report.

Errors may look like:

• Accounts that aren’t yours
• Incorrect balances
• Payments marked late that were paid on time

If you notice any inaccuracies, it’s important that you take the time to dispute the errors. This helps lenders see a more accurate picture of your financial history.

2. Pay your bills on time.

Paying bills on time is the most important thing you can do when it comes to boosting your credit score before buying a house. Your payment history accounts for a significant portion of your credit score, and it serves as a critical indicator of your financial responsibility. Consistently making on-time payments for credit cards, loans, utilities, and other financial obligations demonstrates to lenders that you are a reliable borrower.

While there’s not much you can do about late payments or defaults in the past, it’s never too late to start rebuilding a solid foundation.

One nifty tool to take advantage of is autopay features on bills. In a world of never-ending deadlines and due dates, autopay ensures that your bills get paid on time each month without you having to remember.

3. Pay off your debt.

Paying off debt is essential for improving your credit score because it directly affects two key loan approval factors.

By reducing outstanding balances, you lower your credit utilization ratio, which is a significant component of your score. Having maxed-out credit lines indicates less-than-optimal credit management skills and can tank your score.

Additionally, paying off debt can improve your debt-to-income ratio, another key factor that lenders use in assessing creditworthiness.

4. Keep your spending in check.

Paying off debt and keeping your spending in check go hand in hand.

If you’re working hard to pay off debt, don’t rack up new debt on credit cards and retail cards by overspending. To stay financially healthy in the long run, it’s important to change any spending and money habits that might have caused your credit to suffer.

Fixing your credit is just one part of the puzzle— it’s equally important to maintain good credit by being smart with your money. This means keeping an eye on what you spend, creating and sticking to a budget, and not overspending or buying things you can’t afford.

5. Don’t make sudden changes right before applying for a loan.

If you’re thinking that buying a new home should usher in an era of a bunch of big changes, you may want to think again. In the months leading up to applying for a mortgage, it’s wise to avoid making significant changes that can affect your financial status.

This means avoiding two big things:

• Change in employment: Steady employment shows income stability. Quitting your job right before buying a house can be a cause for worry for a lender.
• Making large purchases or opening new lines of credit: Avoid applying for new lines of credit or loans, including credit cards or auto loans. Such applications can lead to credit inquiries and more debt, both of which can lower your credit score.

In other words, the months leading up to a home purchase is the time to be on your best financial behavior. If you have any doubts about whether an action will negatively impact your ability to get a loan, talk to your lender.

Homeownership is Around the Corner

Your credit score is the compass guiding your path to homeownership, and understanding its role is important. Armed with the knowledge of how credit scores are calculated, what credit scores you need, and ways to bolster your creditworthiness, you can take charge of your financial future! By nurturing your credit score and making smart financial choices, you can transform homeownership from a distant dream into a tangible reality.