You’re a homebuyer hopeful who has a big dream of buying a home of your own. You’ve got a steady job that brings in decent money and you’re emotionally ready to take the plunge to buy. There’s just one thing left to consider: what’s your credit score like?
If you plan to take out a mortgage to buy a house – like most buyers – your lender will take in a number of factors into consideration before extending a loan. And one of the big ones is your credit score. Lenders like to loan out money to borrowers who have a good score. The reason for this is because these borrowers pose less of a risk.
You see, credit scores tell the story of what borrowers’ past debt payment history is like, and if your score is a little on the low side, that likely means you’ve got a few blemishes on your credit report. Lenders typically don’t like that very much because it puts them at a higher risk with the capital they loan out.
There’s also the issue of borrowers with no credit. If you’re just starting out in the world, you might not have any credit built up at all. Whether you’re just graduating from college or are just moving out of your parents’ home, you might not have had the opportunity to build credit, which is a crucial part of your overall financial health.
But if your score is not what it could be, or you don’t have any credit built up at all, there’s no reason to throw in the towel. There is plenty you can do right now to build or improve your credit score in order to improve your chances of getting approved for a mortgage to buy a house.
1. Apply For a Secured Credit Card Long Before Applying For a Mortgage
If you’ve got a lot of time to spare before buying a home and you’ve got no credit, then consider applying for a secured credit card. While it’s usually not recommended to add more credit to your name while you’re searching for a mortgage, applying for a card long before you apply in an effort to build a credit score can be considered an exception.
If you’ve got no credit, lenders will have nothing to base their decision on. No credit score gives lenders no information about what kind of borrower you would be. In this case, you’d need to take steps to build a credit score in a positive way, and a good way to do this is by taking out a secured credit card.
These types of cards differ from traditional credit cards in that they require collateralization in the form of a deposit. This deposit then becomes the credit limit that you are allowed to spend up to. If you use this credit card responsibly – which means making timely payments in full every billing cycle – you can effectively build up a good credit score within a few months.
2. Avoid Taking Out Additional Credit Shortly Before Buying a Home
We just talked about applying for a credit card, so why would you suddenly need to avoid taking out additional credit? If you already have established credit and are very close to applying for a mortgage, then now is not the time to apply for a loan of any type, including a credit card. Adding more debt to the pile can make it more difficult to get a lender to say “yes” to your mortgage application if your finances are already on the cusp of mounting debt.
If improving your credit score is on the agenda, then try to avoid applying for any new loans shortly before buying a home. Any major changes to your finances right before a home purchase is not a good idea, whether you’re thinking of buying a car, charging a big holiday to your credit card, taking out a personal loan, and so forth.
3. Keep Old Debt on the Books
You might have a hankering to improve your credit score, which might prompt you to cut up old credit cards or close out old accounts. But believe it or not, doing so can actually do more harm than good to your credit score.
Of course, any old accounts should be in good standing, whether you choose to close them or leave them alone. If you’ve got old accounts that you haven’t really used much and they’re in good standing, leave them open. Old credit is good credit.
4. Check Your Credit Report For Errors
It’s always wise to review your credit report once a year. After all, how else will you know if there are any mistakes showing up on the report that could be pulling down your credit score?
By getting your hands on your credit report from one of the three major credit bureaus (for free every 12 months), you’ll have the opportunity to see if there are any errors on there, such as incorrect personal information or inaccurate account information. If you find such errors, you can report them to the credit bureau and have these mistakes investigated and rectified. Doing so can easily add a few marks to your score.
5. Take Care of Any Delinquent Accounts
Your payment history is the most important factor influencing your credit score. If you want to give it a boost, not only will you have to make sure you continue to make all payments on time, but you should also consider paying down any balances that are past due or negotiate a settlement with your creditors.
The thing is, paying off a delinquent account won’t remove it from your credit report. However, catching up on late payments can help to clear out your report while continued timely payments can overshadow any blemishes. This will have a positive impact on your credit score over time.
6. Reduce Your Credit Utilization Ratio
Do you have a habit of spending close to your credit limit on your credit card? If so, that’s a habit you need to stop right away. Your credit utilization is a crucial factor when determining your credit score, and the closer you spend to your credit limit, the worse off your credit score will be.
Instead, try to stay as far away from your credit limit as possible in order to reduce your credit utilization. A good rule of thumb is to keep it at 30%, though any less than that would be even better. By increasing the amount of credit you have available to you, your credit score will improve.
7. Pay More Than the Minimum Amount
Every credit card bill you receive will not only stipulate the balance due but also the “minimum amount” required to make sure you stay current on your bill payments without having to pay the full outstanding amount. If building good credit is on your mind, then start paying more than the minimum amount. Having a history of minimum payments can be considered a negative trait for lenders who look over your credit report.
Always do your best to pay more than the minimum, even if it’s not the full amount of the bill. In addition to helping you reduce your balances faster, you can also save some money in interest over the long run.
The Bottom Line
When it comes to buying a home and securing a mortgage to finance the property, your credit score matters. If you want to boost the odds of getting approved for a mortgage, then your credit score should be healthy. If it isn’t, it could throw a wrench in your plans. And if you don’t have any credit at all, that can prove to be just as bad. In either case, it’s imperative to take the necessary steps to build solid credit so you can be more confident going into the mortgage and home-buying process and finally achieve your aspirations of becoming a homeowner.