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You’re ready to buy a home! Question is, how can you improve your credit so you can have a good credit score to buy a house?
Thing is, most people don’t understand the importance of a good credit score…
Even fewer know what it takes to raise their credit!
This article is designed to help you not only learn big picture why your credit score is important, but to also give you actionable steps to improve it.
First, we should start with why you should care!
Whether you’re buying your first home, or looking to buy your dream home, having a good credit score will make a difference on the total price you pay for the property.
This works the same for financing anything (cars, boats, etc.), but for now we’re focused on home purchases.
Lenders will adjust the loan rates you pay based off the quality of your credit score. This can add up to thousands of dollars of the life of the loan.
If you have a better credit score, those dollars will stay in your pocket instead of being paid to the banks.
A house is usually the biggest purchase most people will make in their lives and you want to be in the best position possible to get the best deal!
If you’re not currently in the market to buy, but think you will within the next couple years, you’re in the right place! It’s best to get started raising your credit score now so you’ll be ready when the time comes, and the perfect house presents itself.
Two of the biggest factors in credit ratings is the amount of time a line of credit has been open, and the payment history on that line of credit.
So, the lessons in this article can help everyone today no matter what their current financial goals are!
These are the five items we’ll address today that will put you on track to raising your credit score:
- Find out what your credit score currently is
- Identify Lines of Credit
- Automate Bill Pay
- Be purposeful in using existing credit
- Be Patient
1. DISCOVER YOUR CREDIT SCORE
This is quite easy, but a necessary step in moving forward.
Your credit score is made up by 3 different credit rating agencies (Equifax, Experian and TransUnion).
Your score will fluctuate a little between each company but will usually be within 10 – 15 points.
My preferred method for finding out a credit score is using Credit Karma. I recommend them because their services are free, and they don’t have to run a credit check on you which can have a short-term negative impact to your credit score!
Sign up is easy and they can display all three of the scores on their site.
If you sign up with them, they’ll also send you alerts when your credit changes. This can be a great motivator as you start to see your score climb!
Another way, that takes a little more effort, is to go to each credit agency and request your score.
By law, they are obligated to provide the score to you free of charge one time per year.
This can be effective, but Credit Karma can get the same information from all 3 agencies and save you time.
2. Identify Lines of Credit!
Next, we need to identify exactly how many lines of credit you have.
If the number is zero, then you might not have any credit at all.
While this may sound good logically, it’s not what banks are looking for when underwriting a loan.
These are some of the most common lines of credit: mortgage, auto loan, home equity line of credit (HELOC), credit card, personal line of credit, and student loans.
Other companies that report to the credit agencies can include landlords, utility companies, and service providers.
When creating this list, it’s important to capture all the open lines of credit you may have.
Remember back to those times in the mail when you signed up for the store credit card to save a few bucks?
These lines of credit may still be open even if you haven’t used the card in years!
The biggest thing to focus on now is eliminating any unnecessary lines of credit. I’m not saying cut up all your credit cards, but lenders don’t want to see too many lines of credit.
This makes the individual look like they don’t manage their funds well!
FAQs
You'll typically need a credit score of 620 to finance a home purchase. However, some lenders may offer mortgage loans to borrowers with scores as low as 500. Whether you qualify for a specific loan type also depends on personal factors like your debt-to-income ratio (DTI), loan-to-value ratio (LTV) and income.
How to get your credit score up fast to buy a house? ›
How to improve your credit scores before buying a home
- Check your credit reports and scores. ...
- Select your target credit scores. ...
- Pay your bills on time. ...
- Raise your credit limits and reduce your debt balance. ...
- Avoid applying for new credit accounts. ...
- Consider credit counseling to get a handle on significant debt.
Some home loan options are specifically designed for borrowers with less-than-perfect credit — so technically, yes, 600 can be a good enough credit score to buy a house. However, you may face a few hurdles on the way to homeownership, including higher interest rates and additional costs.
What credit score is needed to buy a $300K house? ›
What credit score is needed to buy a $300K house? The required credit score to buy a $300K house typically ranges from 580 to 720 or higher, depending on the type of loan. For an FHA loan, the minimum credit score is usually around 580.
How to get 800 credit score? ›
Making on-time payments to creditors, keeping your credit utilization low, having a long credit history, maintaining a good mix of credit types, and occasionally applying for new credit lines are the factors that can get you into the 800 credit score club.
What credit score is needed to buy a $400k house? ›
Minimum Credit Score: 620
Suppose you can put 20% down on your $400k home and are otherwise able to qualify for a conventional loan. In that case, you'll probably get some of the lowest monthly payments available – apart from perhaps a VA mortgage.
How to raise your credit score 200 points in 30 days? ›
How to Raise your Credit Score by 200 Points in 30 Days?
- Be a Responsible Payer. ...
- Limit your Loan and Credit Card Applications. ...
- Lower your Credit Utilisation Rate. ...
- Raise Dispute for Inaccuracies in your Credit Report. ...
- Do not Close Old Accounts.
Here are six ways to quickly raise your credit score by 40 points:
- Check for errors on your credit report. ...
- Remove a late payment. ...
- Reduce your credit card debt. ...
- Become an authorized user on someone else's account. ...
- Pay twice a month. ...
- Build credit with a credit card.
On average, it takes about 5 months for your score to climb to its previous level as you make on-time payments, assuming the rest of your credit habits stay strong.
What is a good credit score by age? ›
Consider yourself in “good” shape if your credit score is above the average for people in your age group. Given that the average credit score for people aged 18 to 26 is 680, a score between 680 and 690 (the average for people aged 27 to 42) could be considered “good.”
FICO scores are generally known to be the most widely used by lenders. But the credit-scoring model used may vary by lender. While FICO Score 8 is the most common, mortgage lenders might use FICO Score 2, 4 or 5.
What credit score do I need to buy a 200 000 house? ›
You typically need at least a 620 credit score to qualify for a conventional loan. Though, the higher your score, the better your chances of getting approved for the best rates.
Can I afford a 300K house on a 40k salary? ›
To purchase a $300K house, you may need to make between $50,000 and $74,500 a year. This is a rule of thumb, and the specific annual salary will vary depending on your credit score, debt-to-income ratio, type of home loan, loan term, and mortgage rate. Homeownership costs like HOA fees can also impact affordability.
How much income do I need for a $400,000 mortgage? ›
Assuming a 30-year fixed conventional mortgage and a 20 percent down payment of $80,000, with a high 6.88 percent interest rate, borrowers must earn a minimum of $105,864 each year to afford a home priced at $400,000. Based on these numbers, your monthly mortgage payment would be around $2,470.
Can I afford a 300K house on a 60k salary? ›
An individual earning $60,000 a year may buy a home worth ranging from $180,000 to over $300,000. That's because your wage isn't the only factor that affects your house purchase budget. Your credit score, existing debts, mortgage rates, and a variety of other considerations must all be taken into account.
Can I buy a house with a 700 credit score? ›
So yes, 700 ought to be a good enough credit score to buy a house. In fact, says DiBugnara, “a credit score of 680 or above will likely give borrowers access to 95 percent of financing options available.”
Is a 750 credit score good for a house? ›
A 750 credit score generally falls into the "very good" range, which shows lenders that you're a very dependable borrower. People with credit scores within this range tend to qualify for loans and secure the best mortgage rates.
What credit score is needed for a house? ›
Each lender will have its own criteria for what credit score is needed to qualify for a mortgage and even what is considered a “good” score. However, as a general rule of thumb, you'll need at least a 680 credit score to qualify with a traditional lender, such as one of the Big Six Banks.
Is 720 a good credit score to buy a house? ›
For one thing, you're unlikely to qualify for a lender's best mortgage rates. Lenders typically reserve their top rates for borrowers with very good or exceptional credit scores. However, with a 720 credit score, you should qualify for rates on-par with national averages.
