How to get mortgage-ready with these 5 credit tips

Several factors go into getting a mortgage, including your income, type of home you’re buying, assets and credit. Don’t underestimate the importance of a decent credit score; bad credit can prevent you from getting a good interest rate on your mortgage – or getting a home loan at all.

If you’re considering becoming a home buyer, the first step to take to get mortgage-ready is to make sure you have a healthy (or high) credit score. This will ensure your score is high enough to qualify for a mortgage loan and get a good interest rate.

Let’s determine what a mortgage-ready credit score is and look at five tips that will help you both improve and manage your credit score to prepare for the mortgage process.

Minimum credit score requirements for a mortgage

There is no one credit/FICO^Ⓡ score you need to qualify for a mortgage, but there are minimum credit score requirements. For a conventional loan, you need a FICO^Ⓡ score of 620 or higher. For a Federal Housing Administration (FHA) loan, you’ll need a minimum credit score of 580 and typically a down payment of at least 3.5%. Know that lenders can have their own requirements for home buyers that may be more or less strict than the averages mentioned here.

However, mortgage eligibility isn’t just based on your credit score. 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.

How to get your credit mortgage-ready

If your credit score isn’t yet high enough, don’t worry. There are a number of strategies you can implement to boost your credit score enough to get a home loan. Read along for five tips for getting your credit mortgage-ready.

1. Maintain a credit history

Credit accounts are like wine – the older, the better. Your length of credit history refers to how long your accounts have been open. This determines roughly 15% of your credit score. The longer your credit accounts have been open, the more time you’ll have had to demonstrate your ability to pay back money you owe.

There isn’t much you can do to change credit history in the short-term, but keeping older accounts open will help build your credit history. It’s also important you keep them active. If you don’t use one of your credit cards often, set up a small recurring subscription fee on that card to keep it active.

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 benefit. Regular on-time payments show lenders you’ll likely pay them back in the future, making you a worthy borrower. If you tend to pay bills late or not at all, it’s a red flag to lenders. This shows lenders you’re at a higher risk of not paying them back later on, which can lower your chances of getting a loan.

Even if you qualify and you’re able to finalize your mortgage application, a history of missing payments will likely result in you having higher mortgage interest rates and fees. If you’ve had problems paying bills on time, set up automatic payments or alerts to help you remember.

3. Check your credit score and credit 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 loan or getting a mortgage preapproval letter.

Once you’ve seen all your credit information 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 (carrying a balance less than $300 if you have a credit limit of $1,000) will help to maintain your credit score.

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. Wait until after you’ve closed on your home. It’s also important to keep in mind that closing costs and your down payment may have to be paid upfront. So, holding off on larger purchases until after finalizing your mortgage will leave money to put toward these fees associated with buying a house.

5. Avoid taking out another loan

It’s equally important to wait out large purchases that require a loan, such as cars and student loans. Lenders take into consideration your debt-to-income ratio (the amount of your monthly payments relative to the amount you make), as it helps to measure your ability to manage your monthly payments.

Most mortgage lenders require you have a debt-to-income ratio of 36% or less, so if taking out a loan pushes you past that point, avoid it at all costs.

The bottom line

Good credit doesn’t happen overnight, but you can begin to build 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 wise to get started early. Use these strategies above to increase or maintain your score for your best chance at ideal loan terms.

Is your credit mortgage-ready? Start the mortgage process by filling out an application today with Rocket Mortgage^®.