Going into the home buying process with a great credit score is so beneficial to buyers.  Credit scores are used to determine if you can qualify for a loan as well as what your interest rate will be.  For many first time home buyers, this is the first time they have seriously looked at their credit scores.  If your score is lower than you anticipated, there are some things you can to do improve your credit score before you start looking for a house. Here are some suggestions for how to improve your credit score. Use these suggestions, along with guidance from your lender to improve your home buying power.

Why does my credit score matter?

Lenders use a buyer’s credit score to determine loan eligibility.  Most loan programs have minimum score criteria. These minimum scores are subject to change.  

For example:

  • Conventional Loan: 620
  • USDA Loan: 620 (The program doesn’t have a written minimum requirement, but the banks lending money do.)
  • FHA Loan: 580 or 500 with ten percent down payment

Generally, the higher the credit score, the lower the interest rate will be.

How do I get my credit score?

You can get a free report of your credit scores at Annual Credit Report.  This report allows you to review your credit history and dispute any errors you find with impacting your credit score.  Once you have done this, share this information with your lender.  This, along with other financial information you have provided, can allow your lender to give you some suggestions on  how to improve your credit score.  

You may be surprised to learn that in some cases lenders don’t want to pull a buyer’s score until further in the loan process.  Pulling credit scores by a mortgage lender can get a little tricky if you are near a cut off because these types of pulls of your credit can lower it.  In these cases, your lender will help guide you with what to do to keep your score on an upward path.

Ways to Improve Your Credit Score

Pay All Bills on Time Even a payment just a few days late can impact your score.  Make it a priority to pay all your bills in a timely manner from the smallest Netflix charge to your car payment.  If you have a late payment and fee, you can always contact the company.  Many companies will remove the late fee (which can appear on a credit report) if you make an immediate payment.

Do Not Open or Close An Account  When you are in the market for a home, now is not the time to purchase a new car with a loan.  You should not apply for the store credit card to get an extra forty percent off of today’s purchase.  If you have a credit card that you paid off, do not close the account.  Opening new accounts or closing others can negatively impact your credit score.

Reduce Credit Card Account Balances  Your lender can help you identify what balances to tackle first.   Paying down these balances improves your credit utilization ratio.  This ratio is the amount you owe versus the total available credit.  For example if you have an available credit of $5,000 and you own $3,000 then the credit utilization ratio would be sixty percent.  Ideally, this ration needs to be as low as possible. 

The changes and efforts buyers make into improving their credit scores will be beneficial.  Knowing your score ahead of buying a home gives you time to make any changes.  It is important to note that it takes time to improve your credit score, so the soon the process starts the better.