When you are buying a home and getting a mortgage, the purchase price isn’t really what you are paying. The actual cost of the house is how much you pay in interest to the mortgage lender.
If you get a better interest rate from the lender, your payments will be less. Those who have the best credit get the most favorable loan terms.
So improving your credit score before buying a home is essential. It is not so much what credit score is necessary to buy a house but what scores will give you the best terms and conditions.
There are a few things you can do to improve your credit score in order to qualify for a loan to buy a house. By following these simple steps, you can increase your credit score by up to 50 points in a relatively short time.
Let’s dive in and take a look.
Why is your credit score so essential when purchasing a home?
When your credit score is low you may not be able to procure a mortgage. The majority of all lenders will not give you a loan when your score is lower than 620.
If you are lucky, you may be able to get a traditional FHA loan or FHA 203 k with a score less than 620. So, in order to increase your loan options it becomes crucial to work on improving your scores.
Your credit score is an important factor in determining your mortgage rate. The better it is, the lower your interest rate and monthly mortgage payments will be.
If your credit score is lower than average, increasing it can help you save money on interest rates. But even if your score is good, increasing it could still save you thousands of dollars in interest payments over the life of the loan.
By increasing your credit score by just 50-60 points you could save tens of thousands over your mortgage term.
Credit scores become especially important when you are buying a home a lower income.
What is considered a good credit score?
What do lenders and credit institutions consider a good credit score? The majority of lenders will look at a borrower more favorably when their credit is above 670. If you can get your scores above 740, your credit score is considered very good. Anything above 800 is exceptional.
Each step up the credit ladder will help you lower the interest rate a lender is willing to give you.
How do you check your current credit score?
Everyone is entitled to check their credit score once a year for free. Each of the three major credit bureaus including, Experian, Equifax, and Transunion will provide you with a free credit report. You just need to ask them to send it to you by going to their respective websites.
It is vital that you look over your credit reports yearly to ensure there are no mistakes. Credit reporting mistakes can bring down your scores. Many people have credit errors and don’t even know it.
How to Increase your credit score quickly to buy a home
These are all the things you can do to improve your credit scores to be able to buy a house with more favorable terms.
Fix credit reporting errors
As previously mentioned, check over your credit report for any errors and get them fixed.
Avoid late payments
One of the most vital factors that influences your credit scores is paying your bills before they are due. Late payments can have a detrimental effect on your credit scores. If you find that you’re having problems making timely payments, consider getting auto payments set up.
Keep credit utilization low
Another important factor when improving a credit score is the percentage of your total available credit that you use.
Keeping your credit utilization below 30% of your total credit line is important to maintain a good credit score.
Sign up for credit karma or credit sesame
Two of the best companies out there to help improve your credit history are Credit Karma and Credit Sesame. Their services tell you exactly what you need to do to increase your scores and the service is free.
See a comparison of Credit Karma vs. Credit Sesame.
Final thoughts
Your credit score is one factor that lenders use when considering what interest rate you qualify for on a mortgage. It is certainly a factor that is in your control. If you put the time and effort in, it will improve.
If your credit score is below-average, you may be charged more in interest over the life of your loan than someone with a better credit score.
To improve your credit score quickly, you should focus on reducing your debt, limiting your spending, and paying bills on time.
