Buying a house is likely one of the largest financial decisions you’ll ever make. Your credit score plays a huge role in determining whether you’ll qualify for a mortgage and what interest rate you’ll pay. The higher your credit score, the better your chances of getting approved and scoring lower interest rates.
If your credit score needs some work, you’re not out of luck. With some strategic planning and diligent effort, you can improve your credit score before you submit a mortgage application. Let’s explore some effective ways to give your score a boost.
Understanding Credit Scores and Their Impact on Mortgages
Before we dive into tactics, let’s quickly review the basics of credit scoring and why it matters so much for mortgage loans.
Your credit score is a three-digit number usually between 300 and 850 that indicates your creditworthiness. The higher the number, the lower lending risk you pose in the eyes of banks and creditors.
Credit scores are calculated based on factors like:
- Your payment history
- Amounts owed
- Length of credit history
- New credit accounts
- Credit mix
For mortgages, most lenders prefer credit scores above 620, with scores of 740 or higher giving you access to the best rates and terms. Even minor differences in scores can affect the interest rate you’re offered.
For example, with a $200,000 mortgage loan:
- A borrower with a 760 credit score may get a rate around 3.5%, with a monthly payment of $899.
- A borrower with a 620 score may see rates near 5%, with a payment of $1,068 per month.
Over 30 years, the borrower with the higher credit score would save $93,564 in interest charges. Boosting your score can really pay off!
Now let’s look at some practical steps to improve your credit score before applying for a home loan.
10 Strategies to Raise Your Credit Score
Check your credit reports. Review all three of your credit reports from Experian, Equifax, and TransUnion to spot any errors dragging down your score. Dispute any inaccuracies immediately.
Pay bills on time. Payment history is the biggest factor in your score. Set up autopay or reminders to never miss due dates.
Lower credit card balances. High balances hurt your credit utilization ratio. Pay down balances as much as possible, aiming for under 30%.
Avoid new accounts. Each application causes a hard inquiry that dings your score temporarily. Hold off on applying for new credit.
Become an authorized user. Ask someone with good credit to add you as an authorized user on their card. Their history can help your score.
Manage debts wisely. Speak with a financial advisor about debt management programs to get your finances on track.
Limit hard inquiries. Too many credit checks from lenders will lower your score, so only apply for what you need.
Keep old accounts open. Closing old accounts shortens your history. Use cards occasionally to keep them active.
Monitor progress. Check your score regularly to see the impact of your credit-boosting efforts.
Stay on the electoral roll. Being registered to vote establishes your identity and residency for lenders.
With some strategic planning and persistence, you can improve your credit substantially in 6-12 months. But get started ASAP, as the homebuying process can move quickly once you find that perfect house.
How Your Credit Score Affects the Mortgage Process
Strong credit has advantages at every stage of obtaining a home loan:
Loan approval – Lenders review your credit report and score to approve your application. Higher scores mean better approval odds.
Interest rates – The higher your score, the lower the rate lenders will offer, saving you money over the life of the loan.
Loan terms – Better scores qualify you for more favorable loan terms, like lower down payments and fees.
Future finances – A high credit score sets you up for better rates on future loans, credit cards, insurance policies, and more.
The bottom line? Improving your credit score before applying for a mortgage should be a top priority. The payoff in financial savings and better loan terms over time makes it well worth the effort.
Frequently Asked Questions About Boosting Your Credit Score for a Mortgage
How long does it take to improve your credit score significantly?
With diligent effort, you can raise your credit score by 50-100 points or more within 6 to 12 months. Payment history makes up over one-third of your score, so consistent on-time payments can help boost it quickly. Reducing balances and limiting hard inquiries also provide a fast boost.
How many points do you need to improve your credit score to get the best mortgage rates?
Most lenders offer their very lowest rates for borrowers with credit scores of 740 or higher. If your score is in the mid 600s, boosting it by at least 30 points up over 700 can help you access better rates.
Is it possible to improve your credit score in 30 days?
While fast credit repair is enticing, increasing your score significantly in 30 days is unlikely. Avoid any company that claims it can erase negative marks that fast, as those are likely credit repair scams. With diligent effort, you may see a small boost in 30 days, but plan for 6-12 months to optimize your score.
How much does your credit score affect mortgage interest rate?
Generally, your interest rate drops by 1⁄8 to 1⁄4 percentage point for every 10-20 point increase in your credit score. For example, improving from 620 to 660 could decrease your rate from 5% to 4.5%. Over a 30-year $250k mortgage, that could save over $30,000 in interest.
What is the minimum credit score needed to get approved for a mortgage?
The minimum score depends on the mortgage type. FHA loans allow scores as low as 580 with a 10% down payment. Conventional loans often require 620 or 640 for approval. But for the best terms and lowest rates, aim for at least 740. Checking with lenders about their requirements is wise.
Improving your credit score takes effort, but pays dividends through better mortgage rates and terms. By understanding the key factors in your score and implementing some diligent credit-boosting strategies, you can set yourself up for mortgage approval with the best financing.