How to Improve Your Credit Score to Buy a House

When you’re getting ready to buy a house, getting your finances in order is important. That includes reviewing your credit history and score.

Boosting your credit score takes time and effort but it can help you save money on your mortgage in the long run. Here, personal finance professionals and loan experts share how to improve your credit score to buy a house.

Why is your credit score important when buying a house?

Lenders evaluate your credit score and history when they decide whether to approve you for a loan. “Your score is the measure lenders use to determine how trustworthy a borrower you are,” says Easton Price, CFP, CDFA, at Apella Wealth in Huntington Beach, California. “It’s a reflection of how you have handled borrowed funds in the past.”

Raising your credit score before purchasing a home is one of the smartest moves you can make. Your credit score indicates how you’ve handled debt previously, and you may be eligible for lower interest rates if you’ve reliably repaid your debts.

“When purchasing a home, the consumer wants their credit score to be as high as possible because the credit score has a direct impact on the rate that they will get,” says Spring Henry, mortgage loan originator at Motto Mortgage Cooperation in Valdosta, Georgia. “Many other factors contribute to the [loan] rate, but the credit score is a leading factor in the rate received. The higher the credit score, the less risky the loan is for the lender. The lender rewards this by giving the best rates to the best credit scores.”

A lower interest rate means your mortgage will cost less over time.

Tip:

A $200,000 mortgage with a 30-year term and 7% fixed rate would cost about $279,018 over the life of the loan. Just a half-point drop to 6.5% would cost $255,089 over the entire term.

Your credit score has five components:

35%: Payment history
30% Credit utilization (ratio of debt to available credit)
15%: Length of your credit history
10%: Types of credit used
10%: Credit application frequency or recent searches for credit

Given how much of your score relies on history and credit utilization, it’s best to focus on making on-time payments and keeping your credit usage low, if possible.

“The two main things I tell clients to focus on when starting out or improving their credit score is to make their payments on time, every time, and to pay the full balance due — especially when it’s a credit card,” Price says.

Factors that affect your credit score

It’s important that you have an understanding of the habits that can raise and lower your credit score. Here are some credit habits and how they impact your score:

Paying off all credit card debt every month: This boosts your payment history and credit utilization and can contribute to good credit.
Having a long credit history: A credit card you opened 10 years ago can help you build your credit history, especially if your payments are current or the balance is low.
Spending less than the credit limit: It’s a good idea not to get close to the credit limit you’ve been given every month.
Paying your debts on time: This includes any store credit cards, student loans, and car loans. Late payments will ding your score while routinely paying on time will help you.

Paying off debt decreases your credit utilization which makes up 30% of your overall credit score, Price says. “The less debt you use, the more lenders are willing to trust you.”

Tip:

If you’ve completely paid off an older credit card that you don’t use often, it might help you not to close the account. This can help build your credit history and improve credit utilization, since you have unused credit available.

Steps to improve your credit score before buying a house

Here are a few ways to improve your credit score before you apply for a mortgage:

Live within your budget: Try not to add unnecessary expenses to your credit cards or open additional loans.
Ensure you are not applying for new credit: Taking on new debt before you apply for a mortgage can drop your score and change your debt-to-income ratio (DTI), which lenders use to determine whether you’re likely to afford the additional debt. Wait to open store credit lines or take out a car loan until after you get a mortgage.
Review your credit report: You can request a copy of your credit report (which is free) from AnnualCreditReport.com to make sure everything is in order. Look for errors, typos, and old accounts that should have been closed. Mistakes can hurt your score, so dispute any you find with the reporting agency.

“The best thing to do is to wait until after you close on your new home to open any new credit. Do not put new purchases on credit,” Henry says. “If you need a new couch, stove, or air conditioner, just wait until after you close on your new house.” Purchasing these big-ticket items on credit before you close can impact your credit score, she says.

Tip:

Parents can help boost credit for their kids by adding them as authorized users on credit cards, Henry suggests.

How a higher credit score can impact your mortgage

“The higher the credit score, the more trustworthy of a borrower you are, and lenders are willing to give you funds with a lower associated interest rate because of your proven track record,” Price says. “It’s less risky for them to get their money back. A lower score indicates you don’t have the best track record and thus a higher interest rate is meant to compensate the lender for the added risk.”

How to improve credit score to buy a house FAQ

How long does it take to improve your credit score for a mortgage?

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With diligent and consistent effort, noticeable changes on your credit score can be seen in a few months, Price says. “The only way to speed the process is to develop sound financial habits and live within your means.”

Building a meaningful credit score increases take time, so it’s best to plan ahead. “A few points can make a difference, but don’t expect to jump 100 points overnight,” says Shirley Mueller, founder of Texas Veteran & VA Home Loans, in Austin, Texas.

The Consumer Financial Protection Bureau advises borrowers to work with reputable credit counselors and watch out for credit repair scams that promise large credit increases with little transparency.

Can paying off debts quickly boost my credit score?

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Paying down debts every month can improve your credit score.

To improve your credit score to buy a home, pay down balances so that some only have a small amount on them, and get larger balances down so that they are at least below half of the maximum amount available, suggests Henry.

Does checking my credit report hurt my credit score?

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No. Checking your credit report won’t impact your credit score number when you’re the one pulling your report. It’s referred to as a soft inquiry and is actually a good way to monitor your information and ensure all of the information on these reports is accurate.

Check your credit report for errors and dispute inaccuracies; even small mistakes can have a big impact, Mueller says.

What credit score do I need to buy a house?

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The credit score you need to buy a house depends on the type of loan you’re trying to get, as well as how much of a down payment you plan to put down. Conventional loans that are backed by Fannie Mae or Freddie Mac require a credit score of at least 620.

While it may vary from lender to lender, a score of 750 or higher would likely yield the most favorable loan terms, Price says. “If you have poor credit and don’t have time to repair, then prepare a larger down payment, or negotiate with the lender on buying points to reduce the rate. Although, most buydowns are only temporary.”

The FICO scoring model considers a good score to be 670 or better.

Are there mortgage options for low credit scores?

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Yes, many potential buyers might still qualify for different types of mortgage loans even with a lower score. “The trade-off is usually higher interest rates and potentially stricter loan conditions, which could stretch your budget unnecessarily,” Mueller says.

FHA, USDA, and VA loans are options for consumers with credit scores below 620, Henry says. Most of these programs have additional requirements you’ll need to meet. For example, VA loans are for eligible military members only, while USDA loans are exclusively for rural properties.

FHA loans permit a credit score of 580 if you’re making a down payment of at least 3.5%, or a score as low as 500 with a down payment of 10%.

Meet the expert:

Diana Kelly Levey

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Diana Kelly Levey has 10+ years of finance experience and is an expert on banking and credit cards. Her work has been featured by Bloomberg Businessweek, CNN, and MSN.