Your credit score is hugely important to your homebuying goals. Not only can it determine what mortgage loans you’re eligible for (or if you’re eligible at all), but it can also impact the cost of that mortgage — both monthly and in the long haul.
That’s because mortgage rates — or the interest you’ll pay to take out your loan — are directly tied to credit scores. And the higher your score? The better rate you’ll get (and the less you’ll pay). If you have a lower score, that means a more expensive loan on the whole.
For these reasons, it’s important to pull your credit score before embarking on the homebuyer journey. If it’s lower (think below 700), you’ll want to take some steps to improve it before applying for your mortgage. Generally speaking, lenders reserve the best interest rates for borrowers with 740 credit scores or higher.
Is your score currently below this threshold? Here are five ways you can improve it:
1. Pull your credit report and dispute any errors.
Everyone’s entitled to a free credit report every year (one from each credit bureau), though thanks to the pandemic, consumers can actually pull reports weekly through at least April 2022. You can do this through Experian, TransUnion, or Equifax online.
Once you have yours, check your report for anything that looks off: accounts that aren’t yours, wrong balances, late payments you already settled, etc. Then, contact the credit bureau and dispute those errors. You may need to provide a written explanation or documentation, but once the bureau amends those issues, your credit score should improve as a result.
2. Settle any late or overdue accounts.
Late payments can hurt your credit score significantly, so if you have any accounts that are overdue, settle those up ASAP. You should then set your bills up for autopayment so you’re not late again.
Payment history accounts for a whopping 35% of your score, so consistently paying your bills on time every time is critical to increasing your credit score.
3. Reduce your debts.
Paying down your debts can have a big impact on your score too. This might be hard when you’re already saving to buy a home, but the lower your debts are, the higher your score will be — and the easier it will likely be to qualify for a mortgage.
If you don’t have much cash to devote toward those debts, consider using a windfall — like your upcoming tax refund or that holiday bonus you always get. Every little bit helps.
4. Ask for a credit line increase.
Your credit utilization rate — or how much of your credit cards and other credit lines your balances take up — is also used when calculating your credit score. Lower utilization rates equal higher credit scores, while high utilization rates mean the opposite.
If you can, ask your card issuer or lender to increase your credit line — and don’t spend that extra cash. Once your increase goes through, your utilization rate will fall, helping your score (and your shot at getting a loan).
Here’s an example: Say you currently have a balance of $4,000 on a credit card with a maximum $6,000 credit line. That’d be a 66% credit utilization rate ($4,000 / $6,000). If you increase that credit line to $8,000, though, your utilization rate drops to just 50% ($4,000 / $8,000).
5. Avoid applying for new accounts.
Applying for any kind of credit — a car loan, credit card, or even store card — typically requires a hard credit inquiry, often called a credit pull. These inquiries decrease your score almost immediately (by about 5 points, according to FICO). Several inquiries will do even more damage.
If you know buying a home is in the cards soon, avoid opening new credit or applying for anything that might result in a credit pull. If you need to cover a big expenditure during that time frame, aim to use savings or an existing card at the very least.
Get homebuying help
Do you need more assistance making your homebuying dreams come true? Reach out to Premier Nationwide Lending today.
Premier Nationwide Lending is an Equal Housing Opportunity lender. Sponsored by NTFN, Inc. 6201 West Plano Parkway, Suite 100, Plano, TX 75093 | NTFN NMLS 75333.