Getting Your Credit Ready to Buy a Home

Your credit score is much more than a number. It represents your financial stability and is an important factor that mortgage lenders use to evaluate whether you’ll repay your home loan in a timely manner.

As you prepare to buy a home, assess your credit and how it could affect your eligibility for a mortgage. From here you can determine how to improve your credit score or maintain good credit to comfortably afford the home you want.

The better your score, often the better the terms of your mortgage. Minimum credit score requirements can fluctuate to obtain a mortgage, but lenders can typically find an appropriate loan program for you or assist you in improving your score. 

So let’s dig into how to prepare your credit score for a mortgage.

Get familiar with your credit report

Using a free site like CreditKarma, CreditSesame, or CreditWise can be a quick way to get an idea of where your credit stands. Keep in mind that when you go to qualify for your mortgage the lender will request your actual credit report and score, which will provide official credit scores and the full details of your credit history.

Sites like we listed above show where your credit score stands using various factors.

Understand the factors that impact your score

• Payment history: Making all of your payments on time shows a lender that you’re financially stable. Missing a payment for 30 or 60 days can hurt your score but is easier to recover from than a 90-day missed payment.
• Credit card usage: This evaluates the balance you owe on your credit cards. It’s recommended to stay under 30% of your limit for each card. The average debt across all of your cards is important too.
• Derogatory marks: This can include debt that goes to collections from not being paid for over 90 days or marks against your public record, such as bankruptcies, civil judgments, or tax liens. These can stay on your credit report for 7 to 10 years.
• Credit age: The average age of your open accounts shows how much experience you have using credit responsibly. If you pay off a loan, like a mortgage or student loan, your score could drop, as you’ll lose that credit history. Avoid closing old credit cards that are paid down.
• Total accounts: Lenders like to see that you use a variety of accounts responsibly. Your report will show both your open and closed accounts. Different accounts, such as credit cards and loans, helps your score. If an account closes, it can lower your score.
• Hard inquiries: When you apply for a new credit card or loan, the lender will do a hard inquiry into your credit. This can stay on your report for up to two years, but its impact decreases after about three months. It’s best to minimize your hard inquiries at least 9 to 12 months before trying to get a mortgage or large loan.

If you see any inaccuracies in your credit report, you’ll want to give yourself time to dispute these. Gather documentation that proves the inaccuracy and dispute it with lenders or credit bureaus to remove it from your credit report.

Improve your credit

Addressing the high impact factors that affect your credit is the most efficient way to improve your credit score for a more affordable mortgage.

1. Pay down debt

Paying down credit card debt is a major factor. Your debt should be at or less than 30% of your credit limits. To improve your score further, 10% or less is ideal. This will also help you in the long run, as paying down high-interest credit cards lowers the amount of interest you pay each month, freeing up money to more quickly pay down your balance.

2. Maintain good standing

Life happens and your finances and credit might change unexpectedly. Overall if you focus on making your payments in full and on time, it will help you avoid derogatory marks, all of which have a high impact on your credit score.

3. Allow time for score to adjust

Applying for a new credit card or loan while preparing to get a mortgage can increase the number of hard inquiries you have and lower your average for the age of your total accounts. If you need a new line of credit, try to apply for it well in advance of starting your mortgage process so that your score can level out. Hard inquiries leave your account after 2 years, but their impact lessens after the first three months.

Keep in mind that if you pay down the balance of a loan or card, it can also take one to two months to show the improvement on your credit report.

Maintain good credit

Once you understand the factors that impact your score and how to meet the standards in each of those areas, you can take a few specific actions to maintain your good credit. The strategy is to remain consistent while a lender assesses your financial stability.

Do

• Keep old lines of credit open to maintain a higher level of total accounts and a credit history
• Keep the balance low on credit cards
• Consistently pay your debt on time to show you can reliably manage your credit cards and loans

Don’t

• Apply for or open new lines of credit
• Make large charges or purchases
• Move large amounts of money around between your cards, bank accounts, or loans

Any significant financial changes you make will need to be explained and documented for the lender as you work to secure a mortgage.

Where does your credit stand?

A loan officer can help you assess your current credit score and eligibility for a mortgage.

Reach out to us to connect with a loan officer and discuss your specific situation, needs, and questions to help you get your credit score on the right track to get an affordable mortgage.