How to Increase Your Credit Score to Buy a House

Don’t let your credit score be the reason you can’t accomplish your dreams of homeownership.

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For many people, it’s this number that’s the most significant barrier to purchasing a home. The global pandemic has also necessitated notable changes to mortgage lending policies.

If you’re planning to buy a home, start by pulling your credit report and assessing the situation. Here are some key ways to increase your credit score to buy a home.

Know Your Requirements

Before you head to the bank, determine which types of mortgage you are eligible for and what their minimum requirements entail. Different types of mortgages have different credit score requirements and eligibility rules. 

For example, the minimum credit score for a conventional mortgage is 620. However, the higher your score, the better your rates will be. Additionally, you’ll need a 3% down payment, among other qualifications. 

For an FHA loan, you’ll need a 580 credit score and a 3.5% down payment. If your credit score is below 580, you may be eligible for a mortgage with a 10% down payment.

Determining what your credit score threshold is will help you put your credit report into context. It’s a goal to strive toward and can shape your next steps.

Dispute Negative Credit Report Items

When you pull your credit report, look for negative items that shouldn’t be there. These items could include collections agencies you don’t recognize, loans and funding you hadn’t applied for, and items outside the statute of limitations.

Once you’ve identified the negative items, you can start the dispute process. The onus is on the creditor to provide data validation supporting their items. As the dispute process must occur via conventional mail, you can use templates of credit repair letters that work to improve your chances of success. 

Keep in mind that this process only improves your credit score if there are items that don’t belong on your report. You can’t engage in this process if you let a loan fall into collections last year because you legitimately failed to pay it. 

Improve Your Debt Ratio

Another important consideration that impacts your credit score and your mortgage eligibility is your debt ratio. When applying for a mortgage, they will evaluate your debt-to-income ratio— how much you make versus how much you owe. Your credit score calculates how much you are approved to borrow versus how much you’ve borrowed.

If all other variables remain the same, you’ll have a better credit score if there’s only $5,000 on your $10,000 line of credit than if you owe $8,000. The best way to improve your debt ratio is to pay down your balance owing but leave the credit option open. So, if you pay down that last $5,000, don’t close the line of credit. Instead, leave that $10,000 option there and show the bank that you don’t need it. As a result, your credit score will improve dramatically.

Make Payments on Time

Failing to make payments on time is a careless way to chip away at your credit score until there’s nothing left. Minimum payments exist for a reason. If you can’t pay down your credit card bill this month, you must at least make the minimum payment to maintain your score.

If you struggle to pay your bills on time, set up reminders and automated transfers to guide the process.

Limit Your Inquiries

Finally, refrain from applying for more financing when you’re planning to get a mortgage. One way people try to “hack” their credit score is to improve the debt ratio by getting approved for a higher borrowing amount. However, a hard inquiry will be on your credit score for two years and shows that you need to borrow money. Try to avoid borrowing before getting your mortgage pre-approval. 

Improving your credit score to buy a home takes time. However, with these simple steps, you can make progress toward your dream of homeownership.