4 tips to spruce up your credit score to buy a home – Bankrate.com


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Before you start house shopping, it’s best to get your financial house in order.

To get the lowest mortgage rate, you need a good credit score. It will be the biggest factor in determining your interest rate.

Just a half point difference can have a huge impact on your mortgage and mortgage payment. For example, the difference between a 3.5 percent rate and a 4 percent rate on a $200,000 mortgage is $56.74 per month. That’s a difference of $20,426.40 over the life of a 30-year loan.

So, what is a good credit score to buy a house?

Landing the best mortgage rate

The table below, provided by Fair Isaac Corp. (FICO), the credit scoring company, shows how a range of credit scores affect mortgage rates. To get the lowest rate, you’ll need a credit score of 760 or higher.

But a credit score of only 580 or higher is needed for first-time homebuyers to qualify for a Federal Housing Administration (FHA) loan with 3.5 percent down. If your credit score is lower than 580, you’ll need a 10 percent down payment.

Rates on a $216,000 30-year, fixed-rate mortgage

FICO scoreInterest rateMonthly payment
760-8503.64%$987
700-7593.86%$1,014
680-6994.04%$1,036
660-6794.25%$1,063
640-6594.68%$1,118
620-6395.23%$1,190

Source: FICO (as of 7-19-2017)

Spruce up your credit report

Before applying for a mortgage, request a copy of your credit reports from the three major credit reporting agencies — Experian, Equifax and TransUnion. You’re entitled to a free credit report from each of the agencies once a year. Review them for inaccuracies or incomplete information.

If you find inaccurate or missing data, file a dispute with the credit reporting agency and the creditor. Clearly identify each item you’re disputing and be sure to include supporting documents.

Make your payments on time

To improve your credit score, always make payments on time. Your payment history accounts for 35 percent of your credit score. While late payments stay on your credit report for seven years, their impact on your score diminishes over time.

Pay your debt down

Your credit utilization ratio compares the amount of debt you have to the amount of available credit. This is calculated by dividing the amount of debt into the amount of available credit.

If you have $10,000 in debt and $20,000 in available credit, your credit utilization ratio is 50 percent. Your credit utilization ratio determines 30 percent of your FICO score.

Lenders prefer to see a credit utilization ratio of 35 percent or less. To be sure, FICO’s highest credit achievers have an average revolving credit utilization ratio of less than 6 percent.

While you may not need to reduce your credit utilization ratio to 6 percent to attain a 760 credit score, the less the debt you have, the better off you are.

Still, FICO recommends not opening new credit accounts to increase your credit utilization ratio, as each credit request can slightly lower your score.

Limit your credit applications

Applying for several credit accounts in a short time period makes you an increased credit risk and counts against your score.

There’s one exception to this rule. FICO recognizes that sometimes consumers apply for multiple accounts to shop around for the best rate. That’s why multiple credit applications for mortgages, car loans or student loans made within a 45-day span count as one application.

Opening multiple new credit accounts in a short time can impact your credit score by 10 percent.

FICO recommends against closing accounts to temporarily raise your credit score, as this may reduce your score rather than raise it. This is because it may impact your credit utilization ratio.

Conclusion

Improving your credit score doesn’t happen overnight, but taking these steps will greatly impact your score over time, so you can buy a house with the best mortgage rate.

How you pay your bills, how many credit accounts you have and how you management them can affect your credit score. That, in turn, can impact your mortgage rate as well as your monthly payment.

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