It’s no secret that several factors go into getting a mortgage, including income, type of home you’re buying, assets and credit. Oftentimes, the latter is the overlooked factor; bad credit can prevent you from getting a good interest rate—or getting a loan at all!
If you’re considering buying a house, you’ll want to make sure your credit is healthy enough to qualify for a mortgage and at a good interest rate. Here are five tips from Rocket HQ to help you understand your credit and how you can impact it, so you’re ready well before you get to the closing table.
1. Maintain a Credit History
Credit accounts are like wine—the older, the better. Your length of credit history determines roughly 15% of your credit score and refers to how long your accounts have been open. The longer your credit accounts have been open, the more time you’ll have had to demonstrate your ability to pay back money that you owe.
There isn’t much you can do to change credit history in the short-term, but keeping older accounts will help to build your credit history. It’s also important that you keep them active! If you don’t use one of your credit cards often, a good trick is to set up a small recurring subscription fee on that card.
2. Pay Bills on Time
Roughly 35% of your credit score is determined by your payment history, so it’s important you pay your bills on time.
If you always make payments on time, your credit score will reflect this and show lenders that you will most likely pay them back in the future. If you tend to pay bills late or not at all, this will be a red flag to lenders that you are at a higher risk of not paying them back in the future. Even if you do qualify for a mortgage, if you have a history of missing payments, you’re bound to have higher interest rates and fees.
If you’ve had problems paying bills on time, set up automatic alerts or payments to help you remember.
3. Check Your Credit Score and Report
Think of your credit score like a grade and your report as a test. The grade tells you how you did, but your actual test tells you why you received that grade.
Your credit score and report work in a similar way. You won’t know what has influenced your score until you’ve seen your report, so it’s important to check both before applying for a mortgage. Once you’ve seen all your accounts, credit inquiries and public records in one place, you can see if you’re on the right track or if there are opportunities for you to improve your score.
Gone are the days when checking your credit report a few times a year was enough. Errors, unauthorized accounts and identity theft can happen to anyone at any time, so it’s important to run at least a monthly check on your report in order to spot errors early on.
4. Wait to Make Large Purchases
You may be tempted to begin shopping for furniture and fixings for your new home before you move in, but try to keep any big purchases to a minimum.
Roughly 30% of your credit score is based on your credit utilization or the amount of money you owe relative to your credit limit. Owing more tends to negatively impact your score, whereas owing less tends to help maintain it. Using 30% or less of your available credit limit (i.e. carry a balance less than $300 if you have a credit limit of $1,000) will help to maintain your credit score.
Remember: Your lender will do another credit check right before the loan closes, so you shouldn’t just wait until after you’ve qualified for a mortgage; these large purchases should be made after you’ve gotten your home, not before.
5. Avoid Taking Out Another Loan
It’s equally important to wait out large purchases that require a loan such as cars. Lenders take into consideration your debt-to-income ratio (the amount of monthly payments you have relative to the amount you make), as it helps to measure your ability to manage your monthly payments.
Most mortgage lenders require your debt-to-income ratio to be 36% or less, so if taking out a loan pushes you past that point, you will want to avoid it at all costs.
Minimum Credit Score Requirements For a Mortgage
There is no one credit score you need to qualify for a mortgage, but there are minimums. For a conventional loan, you need a FICO credit score of 620 or higher. For an FHA loan, you’ll need a minimum credit score of 580 and typically a down payment of at least 3.5%.
Remember—mortgage eligibility is based on several factors, not just your credit score, so it’s possible to qualify for a mortgage with a relatively low credit score, but with a higher income and lower level of debt. It’s also possible to be denied with a higher credit score but a lower income and higher level of debt.
Good Credit Starts Right Now
Good credit doesn’t happen overnight, but you can begin to build and improve it today. The difference of a few points can cost you a lot in interest and fees over the course of the loan, so it’s to your advantage to get started early.
The first step will always be to check your credit report. For your free credit report and score as well as additional credit resources, visit QLCredit, a site that helps you truly understand your credit and how you can impact it.