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Though you can buy a house with bad credit, the process is a whole lot easier when your credit score is in good shape. And if you’re teetering between fair and good credit, it could mean a difference of thousands of dollars in interest over the life of your loan.
So before you start your mortgage application, it’s a good idea to boost your score as much as possible. Fortunately, there are several ways to improve your credit score in a matter of weeks.
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What credit score is needed for a mortgage?
The credit score you need to qualify for a mortgage depends on the type of loan you’re after. FHA loans, for example, only require a credit score of 500 to qualify, though you need to put down at least 10% as a down payment and pay private mortgage insurance. To put down just 3.5%, a credit score of 580 is required.
“FHA loans come with additional costs such as mortgage insurance premium, so you will want to make sure that even if you are approved for a loan it is still a wise decision,” said Brian Walsh, manager of financial planning at SoFi.
But for conventional mortgages, he said, the minimum credit score needed is in the mid-600s. An analysis of Credit Karma members shows the average credit score for first-time homebuyers in the U.S. is 684, though the number varies by location, according to Dana Marineau, vice president at Credit Karma.
Even so, that’s probably not good enough to qualify for the best interest rates. To get the best loan terms, you’ll likely need a score of 720 or better.
Ways to increase your credit score quickly
So what can you do to bump up your score within a reasonable amount of time? Though building good credit takes years of maintaining good habits, there are a few things you can do to give your score a boost before applying for a mortgage.
1. Dispute credit report errors.
“You should start by getting a copy of your credit report and looking for any mistakes,” Walsh said. “There may be errors on your credit report that could negatively impact your score.” In fact, one report by the Federal Trade Commission found that one in five consumers had an error on at least one of their credit reports.
To review your credit reports for errors, start by visiting annualcreditreport.com. This is the only website that’s federally authorized to provide free credit reports. Look through each report for mistakes such as incorrect name or address, credit lines that don’t belong to you, duplicate entries, incorrect account status and other errors that could lead to a lower score.
Since each credit bureau collects and reports credit information independently, you’ll need to check all three reports. If you find a mistake, you’ll also need to dispute it with each bureau. Each one has a slightly different process for disputing errors, but instructions can easily be found on their websites.
2. Pay down some debt.
Once you’re sure that your credit reports are up-to-date and accurate, look for ways to reduce the amount of debt you owe.
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One of the major deciding factors in applying for a mortgage is your debt-to-income ratio. This number measures how much of your monthly income goes toward paying back debts.
“If you can pay off a loan, that loan’s monthly payment goes away, improving your debt-to-income ratio,” said Justin Pritchard, a certified financial planner and owner of Approach Financial in Montrose, Colorado. “Lenders prefer that your total debt payments take up a relatively small portion of your total monthly income. Eliminating a payment may help you qualify for a loan.”
Most mortgage lenders require a back-end DTI (the total amount of income allocated toward debt, including your potential mortgage payment) of no more than 43%. So by paying down a credit card balance or paying off your car loan, you will immediately lower your DTI and increase your odds of approval.
And though DTI doesn’t directly affect your credit score, paying down outstanding debt does. That’s because “amounts owed,” also known as your credit utilization ratio, makes up 30% of your FICO score. The more of your available credit you borrow against, the more it can negatively affect your score. So again, by reducing how much debt you have to your name, you become a much more attractive borrower.
3. Ask for a credit limit increase.
In addition to paying down debt, another easy way to improve your score instantly is by getting a credit limit increase. While this won’t change your debt-to-income ratio, it will lower your credit utilization since your outstanding debt remains the same while your available credit increases.
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Often, you can request an increase and get approved instantly through your card company’s website. Sometimes, however, you’ll need to call and ask.
Keep in mind that credit card issuers will sometimes run a credit check before granting a credit limit increase. Doing so results in a hard inquiry on your credit report, though just one inquiry will have a negligible impact. And if your credit has taken a hit since you first opened your credit card account, your issuer might actually lower your limit instead.
4. Get added as an authorized user.
Another way to instantly improve your credit is by piggybacking on someone else’s. If you have a family member or a close friend with excellent credit, you could ask them to add you as an authorized user on one of their credit cards.
When someone adds an authorized user to a credit card, that account’s information is reported on both people’s credit reports. If you’re added to an account with a long, clean history, it can bump your score a bit higher. The best part is, you don’t actually need to use the credit card or even know the card’s information. The primary account holder’s activity will automatically transfer to you, too.
Credit bureaus don’t give as much weight to authorized user status as they do primary cardholder status. Still, every little bit helps. Just keep in mind that you’ll need to share both the good and the bad of that account. If the primary holder misses a payment or maxes out the card, you’ll suffer the consequences as well.
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5. Consider a credit-builder loan.
If you have limited experience with different types of credit, a credit-builder loan might help you diversify your credit mix — which accounts for 15% of your FICO score — and bump up your score a bit.
“These small loans, which are typically less than $1,000, aren’t really loans at all ― at least not in the traditional sense,” said Marineau, the vice president at Credit Karma. “The financial institution deposits the loan amount into a locked savings account you can’t access, and over the next six to 24 months, you pay off the loan just as you would with any other loan. Once the loan is fully paid off, the accumulated money is returned to you in total.”
If you’re worried about adding another credit inquiry to your reports, the good news is that many lenders offering these loans (typically credit unions) don’t require a traditional credit check to qualify. Instead, they might evaluate your banking history through the consumer reporting agency ChexSystems, according to Experian.
6. Request a rapid rescore.
Once you’ve done all the hard work of cleaning up your credit, you’ll want your credit scores to reflect that. That’s where rapid rescoring can help.
“You might be able to use rapid rescoring to get your credit reports updated quickly (within a week or so) and receive a more favorable score,” Pritchard said. This is much faster than the weeks or months it can take for credit changes to be reflected in your score normally. “Not every lender offers that, but if it’s available and it helps, go ahead and use it.”
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Other tips to keep your credit in good shape
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While you’re working to improve your credit before buying a house, there are a few mistakes you should avoid so your progress isn’t undone.
Don’t miss any payments: The single worst thing you can do for your credit is pay a bill late. Payment history makes up 35% of your FICO score ― the most heavily weighted factor.
Don’t apply for new credit: Until you’ve locked in your mortgage, avoid chasing attractive sign-up bonuses and rewards offers. If a lender sees several credit inquiries leading up to your mortgage application, it will be a red flag that you’re too reliant on credit.
Do your rate shopping over a two-week period: That said, you’ll need to shop around and get rate quotes from different mortgage lenders. Fortunately, credit bureaus recognize that rate shopping is a natural part of the mortgage process. “Just make sure you shop around within a short period of time, since inquiries made within a certain window are grouped together,” said Walsh, the financial planning manager at SoFi. “That window is between 14 and 45 days depending on the model used, so plan on shopping around within two weeks to be safe.”
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Keep credit card balances as low as possible: Even if you plan to pay the entire balance when your bill comes, there’s a good chance your balance is reported to the credit bureaus mid-month, making it seem like you’re using a lot of credit. “Even if you pay off your credit cards every month, you need to keep your balances especially low when applying for a mortgage,” Pritchard said. “When they pull your credit, they get a snapshot of your account balances, and that might be from the day before you pay off your balance.” A good rule of thumb is to keep your balance below 30% of your credit limit, though the lower, the better. “If that means paying off your credit card every week while you’re in the application process, it’s probably worth it,” he said.
Don’t close accounts: It might seem counterintuitive, but you should avoid closing any revolving credit accounts like credit cards, even if you aren’t using them. Closing an account immediately reduces your available credit. If you have outstanding debt, this will cause your credit utilization ratio to jump up. Your best bet is to avoid making any major changes until you sign your mortgage contract.
