Personal Finances

How to Improve Your Credit Score for a Home Loan

Dec 7, 2018, 1:20 AM | Robin Kocherhans
A person checking their credit score on their phone

If you're interested in purchasing a home, you've probably wondered what kind of credit score is needed to buy a house. While there are plenty of scores that will get you a mortgage offer, a good credit score for a mortgage will get you a better interest rate.

This little number can make all the difference in saving thousands of dollars over the life of your loan. So, to help give you your best shot, follow the tips below to improve your credit score so you're as prepared as possible when you apply for a mortgage.

Understanding Credit

Your FICO score is the most common score used by lenders, and ranges anywhere from 300 to 850. You'll want to get it as high as feasibly possible because the better your score is, the better chance you have of receiving a good mortgage offer.

Basically, you'll want to aim for the good or excellent credit ranges, all of which are listed below:

  • Excellent Credit: 720 & up
  • Good Credit: 680–710
  • Fair Credit: 620–679
  • Poor Credit: 619 & below

What Factors Impact Your Credit?

There are several factors that play a role in how credit companies asses your credit score:

  1. Payment History – Late and on-time payments, as well as any collections accounts, for the past 7–10 years
  2. Length of History – How long each of your credit and loan accounts have been open
  3. Utilization Percentage – How much of your available revolving credit you're using
  4. New Credit – The average age of your credit accounts & any new accounts you've recently opened
  5. Mixed Credit – The variety of credit you have including credit cards, lines of credit, installment loans, car loans, etc.

Each of these factors is weighed differently as to how much it affects your score. For example, payment history makes up 35% of your score, length of history is 15%, utilization is 30%, and new credit and mixed credit account for 10% each.

To put it simply, these percentages mean that some things will impact your credit score more than others. For example, a late payment on your credit report will negatively affect your score more than not having a variety of credit types.

Improve Your Credit Score for a Home Loan

Because of these different categories and their different impacts on your score, you can use a lot of different methods to improve your score for a home loan.

We've provided seven of the best methods below. Though some strategies work faster than others, the slower ones may have a larger impact, so if you're patient and word hard, you can start improving your credit today.

1. Pull Your Credit Report

Always start by checking your credit score and reviewing your credit report to what, if anything, is impacting your score.

This is an important step because you won't know if you need to fix it if you don't know what score you have. You may even find that your score is higher than you think.

You can get one free credit report per year for each of the main credit bureaus: Equifax, Experian, and TransUnion. Make sure to save these reports—you'll need them!

2. File a Dispute

As you review your credit report, keep an eye out for any negative information. If you notice something reported in error or something fraudulent on your report, make sure to report it to the credit agency.

Something you might specifically want to consider disputing is any late payments. Even if you really were late making a payment, you can still ask the credit bureau if they are willing to remove it. They might not choose to remove them, but it's always worth it to at least ask.

Disputes are conducted individually for each of the credit bureaus. In order to start your dispute, you'll need to visit the websites for Equifax, Experian, and Transunion. If you haven't done so already, you'll need to create an account. Once you're signed in, find their Disputes page and follow their steps.

3. Resolve Collections

Your credit report will also show if you have any accounts currently in collections. If you do, contact the collections agency and inform them you would like to pay the collections account.

When you speak to them, let them know that you need a "pay for delete" letter in writing. Without this letter, your credit score will not improve, no matter what the collections agency tells you.

Make sure you take note of the person's name who you spoke with at the collection agency, as well as their extension. That way, if there are any issues receiving your "pay for delete" letter, you will be able to contact them.

Finally, when you receive your "pay for delete" letter, it means the collection account should be completely erased from your credit history, though it could take up to 30 days to show on your report.

4. Pay Down Debt

This method of improving your credit score for a home loan can actually work very quickly if you are currently using a high percentage of your rotating credit. By paying down the balances on your credit cards and other revolving lines of credit, you'll quickly reduce your credit utilization percentage.

Basically, the lower your utilization, the better off you are. The best rule of thumb is to keep each account below 30%. However, if you can, it's better to pay it down to as close to zero as possible.

Another way to reduce your credit utilization percentage is to get a personal loan to consolidate the debt. These kinds of loans are called installment loans, so they don't count towards your credit utilization, which can dramatically improve your credit score for a home loan.

5. Become an Authorized User

If you don't have a lot of mixed credit, or have a relatively short credit history, see if a relative or friend with excellent, well-established credit will add you as an authorized user to one (or more) of their credit cards.

The purpose is not to get a card you can use, but to take advantage of the credit history associated with their card in order to boost your own.

6. Make Timely Payments

Late payments will hurt your credit score significantly and can take a long time to recover from. Mortgage lenders are understandably hesitant to lend money if they don't see a consistent track record of timely payments.

However, it can take six months to a year to bring your credit up if you have a history of late payments, so it's important to start the process as soon as possible.

To get back on track, set up monthly payment reminders or set up automatic payments for your bills so you don't have to worry about missing anything.

7. Slow Down on the Credit Cards

Every time you open a new credit card or loan, it is considered new credit. Having too much new credit can make it appear that you are overextending yourself financially and will lower your score.

To prevent this from happening, don't apply for a lot of credit cards at once and limit the amount you have open.

It's also good to know that each time you apply for a card, there is a hard inquiry on your credit. Hard inquiries lower your score, which credit card applications counterproductive if you're looking to raise it.

What Credit Score Is Needed to Buy a House?

Improving your credit score for a mortgage is great, but if you don't have an end goal for your credit or a number to help you determine when you can begin your mortgage application, raising your score won't help much.

Most conventional lenders want you to have a score above 640; anything below that will make it difficult for you to get approved. Scores between 680–720 usually get good rates, but a score of 740 and up is best, if possible.

Just because a conventional lender may not approve your credit score for a mortgage, it does not mean you should give up. FHA loans work with credit scores as low as 500, and VA home loans have no minimum requirement, though some lenders may set internal minimums that are usually around 620.

Healthy Credit Habits, Happy Mortgages

Now that you know what credit score is needed to buy a house, and you have ways of improving your credit, you are ready to begin establishing healthy credit habits and preparing for the financial responsibility of homeownership.

When you are ready to apply for a mortgage or refinance an existing one, you can relax and enjoy the home buying process, without worrying about whether your credit is good enough.

Robin Kocherhans

Robin has been writing about mortgages for almost 2 years and has been a professional writer for 8. She loves researching and answering your questions about home loans and the mortgage process, as well as helping simplifying complex topics to make them easier for you to understand.