How to improve your credit score for a mortgage

Your credit score is one of the primary factors mortgage lenders consider when you apply for a loan. If your score needs work, there are steps you can take to improve it before you apply. Here’s everything you need to know about how to improve your credit score to buy a house.

Mortgage credit score requirements

The minimum credit score needed to qualify for different types of mortgages ranges.

Still, it’s best to have the highest credit score possible before you apply for a mortgage. In fact, the average credit score for a borrower getting a purchase loan is 738, according to Optimal Blue’s May 2024 Market Advantage report.

How to improve your credit score before getting a mortgage

1. Check your credit reports and scores

Get a copy of your credit report from each major credit bureau (Equifax, Experian and TransUnion) through AnnualCreditReport.com. Aside from reviewing your scores, make sure there are no mistakes, especially regarding late payments or closed accounts. If there is an error, contact the bureau to dispute it as soon as possible.

2. Pay all your bills on time

To improve your credit score for a mortgage, keep all your accounts in good standing. Missing a payment can lower your credit score, and late payments can stay on your report for up to seven years. If you’re currently late on a payment but still within the grace period, contact the creditor right away to see if you can get things back on track (and the late charge erased). If you do have a late payment on your record, strive to make payments on-time moving forward.

3. Reduce your credit card balances

Your credit utilization ratio is the amount you owe against your total available credit, and it accounts for 30 percent of your score. The lower the ratio, the better. As a rule of thumb, if your utilization is over 30 percent, work to pay down those balances so you’re under that threshold.

4. Avoid opening new accounts

Applying for new credit will affect your score. If you can, avoid opening new credit card accounts or taking out more loans before you apply for a mortgage. Follow this tip during the application and mortgage underwriting process as well. By the same token, don’t close any old accounts, either — this can raise your utilization ratio and have a negative effect on your score.

5. Get help from a responsible credit user

If you’re a younger first-time buyer, you might not have a very long credit history. One way to improve credit to buy a house: Become an authorized user on a parent’s or relative’s credit card. The primary cardholder (your parent or relative) will continue to make the payments, but you’ll benefit from the positive payment history.

What factors determine your FICO credit score?

There are several categories of your credit history that inform your current score. Some things affect your score more than others. According to Equifax, one of the major credit bureaus, your FICO score is determined using a formula that roughly looks like this:

• On-time payment history: 35 percent
• Amount of debt: 30 percent
• Length of total credit history: 15 percent
• Number of new accounts: 10 percent
• Type of credit utilized: 10 percent

Credit bureaus tend to assign “good debt” and “bad debt” labels to your current debt. Home loans and other debt that can increase your financial worth in the long term are considered good. Credit card debt and other revolving accounts that don’t go toward a valuable asset are more likely to decrease your FICO score.

Why is a higher credit score beneficial when applying for a mortgage?

The higher your credit score, the better chance you’ll have of being approved for a mortgage. This is because lenders want to ensure you’ll repay the owed amount, and your credit score is one factor they look at to determine your risk level. A higher credit score will usually get you a lower mortgage rate.

Even a small difference in the mortgage rate you get affects your monthly payment and overall loan cost. For example, using Bankrate’s mortgage calculator, let’s say you buy a $300,000 house with a 6.875 percent fixed rate and put 3 percent down. Your monthly payment would be about $2,176. If you had a 7 percent fixed rate, your monthly payment would be $2,200. While the difference looks small at first, over the course of a 30-year mortgage, you’d save over $8,000.

Next steps in the mortgage process

Improving your credit and saving for a down payment are two of the biggest steps in getting ready to buy a home. Next, you’ll need to:

1. Get your financial paperwork together.
2. Shop around for a loan.
3. Get preapproved.
4. Have an offer accepted on a house.
5. Go through the underwriting process.
6. Close on the home.

To get the full details on the mortgage process, read our guide on how to get a mortgage.

FAQ

• How quickly can you improve your credit score?

  Items like a missed payment or bankruptcy will stay on your credit report for up to seven years, but the impact decreases after a few years. If you want to improve your credit score fast, pay down your current debt and avoid opening new accounts. Ideally, you want your credit utilization ratio to be 30 percent or less. If you can increase your credit limits on card accounts, that can help within a month or so, too — it improves the credit utilization ratio from the opposite end.

• Can you get a mortgage with bad credit?

  It’s still possible to get a mortgage with bad credit or less-than-ideal credit. However, the lower your score, the harder it will be to secure a mortgage. For instance, you may be able to get an FHA loan with a credit score as low as 500, but you’ll need to put 10 percent down. If you can get your score up to 580, you can get an FHA mortgage with 3.5 percent down. Know also that some lenders have stricter requirements, so it’s smart to compare lenders who specialize in low-credit-score mortgages.