If your credit has taken a bit of a hit, you must make changes to rebuild your score. With a higher credit score, applying for a mortgage with better terms and lower interest rates will be easier. This could give you the credit score needed to buy a house with the terms you want.
Increasing your credit score to buy a home is always beneficial as it will improve the loan terms the lender offers.
But what is a good credit score to buy a house? While the FHA will allow borrowers with scores as low as 500, you should aim higher.
You will normally need a score of 620 for a conventional mortgage, but 740 will get you better loan options. With a higher credit score, the home loan will cost you less; more favorable terms and mortgage options will be available.
You could turn things around if you start paying your bills on time, lowering balances, and opening accounts that provide data to the major credit bureaus. But knowing where to begin to improve your credit score isn’t easy.
We look at how you can improve your credit before applying for a mortgage. These tips will help you maintain a healthy credit score.
Credit file building
As a potential home buyer, there are many things you should know about credit scoring.
You need a few open credit accounts to show you have a good track record as a borrower. This will be reported to the credit bureaus, building your credit file.
You could start with a secured card if you don’t have good credit. This will be easier to get from a lender and will allow you to begin building your credit file.
Another option is to become an authorized user on somebody else’s credit card. As long as they are very responsible with their credit card and don’t mind you being a user on their account, this could improve your credit score.
Make payments on-time
Payment history plays a large role in determining your credit score. If you miss payments, a lender won’t see you as a good risk, which is reflected in your credit score.
Avoid missing payment dates by 30 days, as these can be reported to credit bureaus. If you have difficulty making payments, contact the lender to discuss options instead of hurting your credit score.
Settle past-due accounts
If you have accounts you are behind, getting them back on track can improve your score. This will stop further missed payments from adding to your problems.
A debt counselor can help you if you are struggling with your debts. They will create a debt management plan that could reduce your payments and the interest rates you are paying.
Lower revolving balances
Even if you aren’t behind on your bills, using much of your available credit will negatively affect your credit score.
When you have credit cards or lines of credit, keeping the balance lower to reduce your credit utilization is better. High credit utilization rates will push down your credit score.
Limit your credit applications
Though you need to open accounts if you don’t have any, too many applications can be problematic. Each time you apply, a new hard inquiry on your credit record will temporarily hurt your credit score. New accounts also mean that the average age of your credit is reduced, affecting your credit score.
These issues are only minor negatives on your credit score, but they add up. If you are applying for a new loan, comparing your options is a good idea. However, multiple hard inquiries on your accounts for the same type of loan won’t hurt your credit score if they are close together.
How quickly can you rebuild your credit?
How long it will take depends on what caused the problem in the first place and the things you are doing to turn things around.
If you missed one or two payments, your score would be much easier to fix than missing multiple payments across different accounts and falling more than 90 days behind.
Whatever your situation, these negatives will gradually disappear if you start doing the right things. Most things will be removed after 7 years, though bankruptcies can remain for 10 years.
You might be tempted to use credit repair or debt settlement companies to fix your credit problems. However, they can’t usually do anything you can’t do by yourself, and if you do it yourself, you won’t be paying a large fee.
Final thoughts
When applying the above principles, getting a good credit score to buy a house is simple. Remember, though, that changing your current credit profile won’t happen overnight. You need to create sound habits and follow them religiously.
