Buying a home is an exciting milestone, but if you’re like most buyers, improving your credit score for a home purchase will play a significant role in determining the type of mortgage you qualify for and the interest rate you’ll pay. A higher credit score can save you thousands of dollars over the life of your loan and open up more options for financing.
Why Credit Matters for Homebuyers
Qualifying for a Mortgage: Lenders consider credit scores as one of the primary factors when approving home loans. A higher score can open doors to more loan options. A 2022 study by the Federal Reserve showed that 90% of mortgage loans went to borrowers with credit scores of 650 or higher.
Lower Interest Rates: Better credit scores typically mean lower interest rates, which can save buyers thousands over the life of a mortgage. Borrowers with credit scores of 760 or higher save an average of $250 per month on a $300,000 mortgage compared to borrowers with scores below 700, according to Freddie Mac.
Higher Loan Limits: A strong credit profile may allow buyers to qualify for larger loans, expanding their options for homes in competitive markets. Experian notes that buyers with scores above 740 are more likely to qualify for jumbo loans in high-cost areas.
Steps to Improve Your Credit and Get in a Strong Position to Buy a Home
Whether you’re starting with no credit or have a low credit score, there are several actionable steps you can take to improve your creditworthiness and put yourself in the best position to secure a mortgage. Here are some strategies:
1. Start Building Credit with a Secured Credit Card
If you have no credit, a secured credit card is a great way to begin building your credit. You’ll deposit money as collateral, and your credit limit will typically match the deposit. Use the card responsibly by making small purchases and paying the balance in full each month. Over time, this will establish a positive payment history, which is crucial for building credit.
2. Pay All Your Bills on Time
Your payment history is one of the most critical factors in your credit score. Even one missed payment can negatively impact your score. Set up reminders or enroll in automatic payments for credit cards, utilities, and other bills to ensure you never miss a due date. Payment history accounts for 35% of your credit score, making it the largest factor, according to Experian.
3. Consider Becoming an Authorized User
If you have a family member or friend with good credit, ask them to add you as an authorized user on their credit card account. This allows you to benefit from their positive payment history, even though you’re not responsible for making payments. Just be sure they continue managing the account responsibly, as negative activity could affect your credit score too.
4. Keep Your Credit Card Balances Low
The amount of credit you use compared to your total credit limit, known as your credit utilization ratio, plays a significant role in your score. Aim to keep your balances below 30% of your credit limit. For example, if your credit limit is $10,000, try to keep your balance under $3,000. Keeping your utilization low shows lenders that you’re not overly reliant on credit.
5. Review Your Credit Report for Errors
Errors on your credit report can harm your score. You’re entitled to a free credit report every year from each of the three major bureaus: Experian, Equifax, and TransUnion. Check for inaccuracies like incorrect account balances or accounts that don’t belong to you, and dispute any errors. A Consumer Reports study found that 34% of consumers identified at least one error on their credit reports.
6. Pay Down Existing Debts
Reducing debt is a key strategy for improving your credit. Focus on paying down high-balance debts while continuing to make minimum payments on other accounts. This not only lowers your credit utilization ratio but also demonstrates to lenders that you’re managing your finances well. According to Experian, reducing credit card balances can increase your credit score by up to 30 points.
7. Avoid Applying for New Credit
Each time you apply for new credit, a hard inquiry is added to your credit report, which can temporarily lower your score. If you're planning to buy a home soon, avoid opening new credit accounts unless absolutely necessary. Hard inquiries typically lower your credit score by 5–10 points.
8. Maintain Older Credit Accounts
The length of your credit history impacts your score. Keep your oldest accounts open, even if you're not using them regularly, as long as they don’t have high fees. A longer credit history can boost your score. The average age of accounts for people with excellent credit (800+ FICO® Scores) is over 11 years, according to Experian.
9. Use a Credit Builder Loan
Credit builder loans are designed to help people build or rebuild their credit. These loans are typically offered by credit unions or community banks and work by having you borrow a small amount of money, which is then placed in a savings account. You’ll make monthly payments toward the loan, and once it’s paid off, you get the money back. These payments are reported to the credit bureaus, helping improve your credit score over time.
10. Settle Collections Accounts
If you have any accounts in collections, paying them off or negotiating a settlement can help improve your credit. Contact the collection agency to arrange a payment plan or a lump sum settlement for less than the amount owed. Once the debt is settled, request that the agency updates your account status with the credit bureaus. While this might not immediately boost your score, it will show that you’re taking responsibility for your financial obligations.
11. Be Patient and Stay Consistent
Improving your credit takes time and consistency. The more proactive you are in managing your credit and making timely payments, the stronger your credit profile will become. The benefits of a higher credit score, such as lower interest rates and better loan options, are worth the wait.
Final Thoughts
Improving your credit, whether you’re starting from scratch or working to repair bad credit, is a journey that takes time and dedication. But the good news is, it’s absolutely achievable. By following the steps outlined above and remaining consistent, you’ll be well on your way to qualifying for a mortgage and securing the financing you need to purchase your dream home.
If you have any questions or need guidance on your homebuying journey, feel free to reach out. I’m here to help you every step of the way as you work toward achieving your homeownership goals!
