When applying for a loan, mortgage lenders heavily weigh your credit score as a crucial element. If your score isn’t where it should be, there are various strategies you can implement to enhance it prior to your application. Here’s a comprehensive guide on boosting your credit score to facilitate home purchasing.
Mortgage credit score requirements
Loan Type: Minimum Credit Score
Conventional: 620
Jumbo: 700
FHA: 580 (or 500 with 10% down)
VA: 620 (VA doesn’t require a minimum credit score, but lenders do)
USDA: 640
How to Improve Your Credit Score Before Getting a Mortgage?
Check your credit reports and scores
Obtain your credit report from all three primary credit bureaus (Equifax, Experian, and TransUnion) by visiting AnnualCreditReport.com. In addition to checking your scores, ensure that there are no inaccuracies, particularly concerning late payments or accounts that should be closed. If you identify any discrepancies, reach out to the respective bureau to contest the issue promptly.
Pay all your bills on time
To boost your credit rating for a home loan, ensure that all your accounts are maintained properly. Failing to make a payment can negatively impact your credit score, and delinquencies may linger on your report for as long as seven years. If you are behind on a payment but haven’t exceeded the grace period, reach out to the creditor promptly to explore options for rectifying the situation (and potentially waiving the late fee). Should you find a late payment in your history, aim to ensure your payments are punctual from now on.
Reduce your credit card balances
Your credit utilization ratio is your outstanding balance against your total available credit, and it accounts for about 30 percent of your score. The lower the ratio, the better. As a rule of thumb, if your utilization is over 30 percent, work on paying down that balance so you’re under that threshold.
Avoid opening new accounts
Applying for new credit will affect your score. If possible, avoid opening new credit card accounts or taking out more loans before applying for a mortgage. Follow this tip throughout the application and mortgage underwriting process as well. Similarly, don’t close any old accounts – this can increase your utilization ratio and negatively impact your score.
Get help from a responsible credit user
As a younger person looking to purchase your first home, your credit history may be limited. A helpful strategy to enhance your credit before buying a house is to be added as an authorized user on a family member’s credit card. The main account holder, who is your parent or relative, will handle the payments, while you reap the rewards of their strong payment record.
What Factors Determine Your FICO Credit Score?
Your credit history can be divided into various segments that impact your present score. Certain factors carry more weight than others. As stated by Equifax, a leading credit reporting agency, your FICO score is calculated based on a formula that generally resembles the following:
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
Conclusion
To improve your credit score for a mortgage, pay bills on time, reduce credit card balances, avoid new debt, check your credit report for errors, and maintain a good credit mix. Consistently practicing these habits can boost your score, making you eligible for better loan terms and interest rates.