When applying for a mortgage, one of the key elements that lenders evaluate is your credit score. If your score isn’t where it should be, there are actions you can take to enhance it prior to applying for a loan. Here’s a comprehensive guide on boosting your credit score for purchasing a home.
Mortgage credit score requirements
| Type of Loan | Minimum Credit Score |
|---|---|
| Conventional | 620 |
| Jumbo | 700 |
| FHA | 580 (or 500 with 10 percent down) |
| VA | 620 (VA doesn’t require a minimum credit score, but lenders do) |
| USDA | 640 |
How to improve your credit score before getting a mortgage
1. Check your credit reports and scores
Obtain your credit report from the three principal credit bureaus (Equifax, Experian, and TransUnion) by visiting AnnualCreditReport.com. In addition to checking your scores, ensure there are no inaccuracies, particularly concerning late payments or accounts that have been closed. Should you find an inaccuracy, reach out to the bureau promptly to challenge it.
2. Pay all your bills on time
To enhance your credit rating for a home loan, ensure that all your accounts are maintained properly. A missed payment can negatively impact your credit score, while late payments may remain on your file for as long as seven years. If you find yourself late on a payment but are still within the allowed time frame, reach out to the lender immediately to explore options for rectifying the situation and potentially waiving the late fee.
Should there be a late payment noted in your history, aim to ensure all future payments are made promptly.
3. Reduce your credit card balances
The ratio of credit utilization reflects how much you owe compared to your total credit limit and is responsible for 30 percent of your credit score. A lower ratio is preferable. Generally, if your utilization exceeds 30 percent, strive to reduce your balances to remain below this limit.
4. Avoid opening new accounts
Getting new credit will impact your credit score. It’s best to refrain from opening additional credit card accounts or securing new loans before applying for a mortgage. This advice holds true throughout the mortgage application and underwriting phase too. Similarly, avoid closing any existing accounts, as this could increase your utilization ratio and adversely affect your score.
5. Get help from a responsible credit user
As a first-time buyer in your younger years, you may have a limited credit history. To enhance your credit for purchasing a home, consider becoming an authorized user on a family member’s credit card. Your family member will handle the payments, while you gain from the good payment record.
Why is a higher credit score beneficial when applying for a mortgage?
A better credit score increases your likelihood of success in securing a mortgage. Lenders assess your ability to repay the borrowed amount, and your credit score plays a significant role in evaluating the associated risk. Generally, having a higher credit score can lead to more favorable mortgage rates.
A slight variation in the mortgage interest rate can significantly impact your monthly payment and the total cost of your loan. For instance, using Bankrate’s mortgage calculator, suppose you purchase a home priced at $300,000 with a fixed rate of 6.875 percent and make a down payment of 3 percent. In this scenario, your monthly payment would be around $2,176. Conversely, if the fixed rate were 7 percent, your payment would increase to $2,200.
Though the initial disparity may seem minimal, throughout the duration of a 30-year mortgage, you would end up saving more than $8,000.
Next steps in the mortgage process
Enhancing your credit score and accumulating funds for a down payment are essential steps toward homeownership. Following that, you should:
- Organize your financial documents.
- Shop around for a loan.
- Get preapproved.
- Get a house offer approved.
- Go through the underwriting process.
- Close on the home.