How to Improve Your Credit Score Before Buying a House

If you’re hoping to buy a home, your credit score is one of many important factors in qualifying for a mortgage, as it helps indicate whether you’re a trustworthy borrower. However, if your credit score needs improvement, there are plenty of simple ways to raise it. 

In this Redfin article, we’ll outline the steps you can take to improve your credit score before buying a home. Whether you’re buying a home in Dallas, TX, or a condo in Milwaukee, WI, here’s how to fix your credit score. 

Key takeaways

• Minimum credit scores for a mortgage range from about 500 to 700, depending on the loan.
• Conventional loans require a minimum credit score of 620. 
• Paying bills on time, raising credit limits, and reducing debt can improve a credit score. 

What is a credit score, and why is it important when buying a home?

A credit score is a three-digit number that ranges from 300 to 850. It indicates how responsible you are when paying bills. A higher credit score indicates to lenders that you are a responsible borrower and likely to pay back what you owe. A lower credit score can indicate to lenders that you may be a credit risk. Factors lenders may look at include missed payments, overextending credit lines, not enough credit, or unpredictable spending habits. 

Your credit score is determined by credit reports, which show your credit and payment history. There are three main credit bureaus – Equifax, Experian, and TransUnion – that provide credit scores.

Credit scores are especially important when buying a home. Higher credit scores can help improve the likelihood of getting a mortgage and potentially result in better mortgage terms. If your credit score is lower, you may not qualify for some loan types or even have a higher interest rate. 

How to improve your credit score before buying a home

If you need to fix your credit before buying your first home, there are several steps you can take. Let’s look at them:

1) Review your credit report

The first step to fixing your credit is to check your credit report for any inaccuracies. You can obtain a free credit report from all three credit bureaus, Equifax, Experian, and TransUnion, on AnnualCreditReport.com. Check each report thoroughly for any errors and look through your spending habits. If you notice any errors in the report, dispute them directly with the creditor or bureau.

2) Pay your bills on time

Your record of on-time payments is one of the most important factors in determining your credit score. Therefore, it’s one of the easiest ways to improve your credit score. Late or missed payments can negatively affect your credit score and stay on your credit report for several years. Keeping up with your minimum payments each month can help fix your credit score. 

3) Reduce your debt balance

Your credit utilization ratio is the amount of credit you owe divided by the amount of credit you have available. It typically accounts for 30% of your credit score, and the lower the percentage, the better. Usually, a credit utilization ratio above 30% can negatively impact your credit score.  Paying down your balances each month can help reduce this ratio. 

4) Raise your credit limits

If you typically pay your bills on time each month, but you’re close to reaching your credit limit, then you may want to consider increasing your credit limit on one of your cards. As long as your spending habits stay the same, this will help decrease your credit utilization ratio. 

5) Don’t apply for new lines of credit

While it may seem like the right plan to open a new line of credit to indicate you’re a responsible borrower, it’s better to avoid this. Opening a line of credit triggers a hard inquiry, which is when a lender pulls your credit report. A hard inquiry causes your credit score to temporarily drop. If you’re trying to improve your credit, it’s best to avoid anything that negatively impacts your score. 

6) Pick a target credit score

Setting a goal for your credit score is a great way to keep yourself on track to qualify for a mortgage. Depending on the type of mortgage you want to qualify for, the minimum score will change. For example, if you’re hoping to qualify for a conventional loan, the minimum credit score is 620. 

7) Consider credit counseling if you have a lot of debt

If you have a significant amount of debt and are unsure where to start, consider using a certified credit counseling service. A credit counselor can help you come up with a budget, payment plan, and negotiate with creditors on your behalf to reduce your interest rate or monthly payments. Choose a nonprofit service to minimize or avoid fees

What is a “good” credit score for a mortgage?

Each type of mortgage loan has different credit score requirements, and higher scores can often lead to better interest rates and loan terms.

FAQs about credit scores

What determines your credit score?

There are five factors that determine your credit score, each with its own percentage contributing to the total score. 

• Payment history: 35%
• Current loans and credit card debt: 30%
• Length of credit history: 15%
• Number of accounts: 10% 
• Type of credit used: 10%

How long does it take to repair credit?

On average, it takes 3 to 6 months, but it depends on how much you need to fix your credit. Missed payments or Chapter 13 bankruptcies can stay in your credit history for seven years, so it depends on what you need to repair. 

What is a FICO score?

A FICO score is a type of credit score originated by the Fair Isaac Corporation (FICO). All FICO scores are credit scores, but not all credit scores are FICO scores. The three main credit bureaus (Equifax, Experian, and TransUnion) all provide FICO credit scores. 

How do I calculate my credit utilization ratio?

For example, you have 2 credit cards: Card A has a limit of $3,000 per month and you typically spend $2,500, Card B has a limit of $500 per month and you typically spend $50. Your total limit is $3,500, and your total balance is $2,550. 

$2,550/$3,500 = 0.72 x 100 = 72%

What is debt-to-income ratio (DTI)?

Debt-to-income ratio (DTI) is your monthly debts divided by your gross monthly income. Any debts you have on credit cards or loans are included in these monthly debts. Lenders use DTI as one tool to help determine whether you’re a trustworthy borrower.

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