If you’re considering buying your first home but know that your bad credit will be an obstacle, let’s dive into what your credit will need to look like in order to qualify for a mortgage and what you can do to raise your score to make it more appealing to lenders.
What Credit Score Do I Need to Buy a House?
It’s important to note that there are several types of loans made available to borrowers, and each one will typically require you to have a minimum credit score in order to qualify.
For example, a conventional mortgage may expect you to have a credit score of at least 620. Meanwhile, those looking for an FHA loan will typically need a 520 credit score, and those who want a VA loan must have a score of anywhere from 580 to 620.
That being said, the average score for most states tends to lie in the upper 600 range. If you fall below these scores or have had a difficult time securing a home loan (on top of closing costs and other fees), there are actions you can take to improve your credit rating.
6 Ways to Improve Your Credit Score
In some instances, a bigger down payment will make it easier for you to secure a home loan. But credit history can be much more important to mortgage lenders and loan officers, which means that being able to pay more may not always be a factor in their decision.
The best course of action to take is to focus on improving your credit score so that you’ll be more likely to be approved in the future. But where do you begin?
Here are six ways to improve your credit score to make you a better candidate for your chosen mortgage options.
Improve Your Payment History
Unfortunately, you can’t change the current payment history that’s reflected on your credit report. What you can do, however, is start over now and make a more conscious effort to stay on top of your bills to improve your credit report moving forward.
Your payment history is one of the most critical deciding factors in whether or not a lender is going to give you a home loan. Good payment history is built when you make payments on time and avoid carrying too much of your remaining balance over to the next payment period.
You can avoid missing payments that negatively affect your history by setting up alerts on your banking app or personal calendar, setting up automatic payments to pay what you owe when it’s due, and making sure that you can afford whatever you’re paying for ahead of time.
This shows mortgage lenders that you’re responsible and able to pay your monthly payments.
The easiest way to develop your payment history is with your credit cards. But if you want to build credit without a credit card, then credit builder loans are a good option too.
Pay Off Credit Card Debt
One reason it’s so easy to get into credit card debt is because of the hefty late fees and high-interest rates that credit card companies place on late payments.
Once you fall behind, these charges then build on top of your existing debt. If you find yourself struggling to pay it off and continue opening new lines of credit, you’ll put yourself further into debt that you won’t be able to get out of, further impacting your credit report.
Additionally, this unpaid debt can increase your credit utilization ratio. You want your credit utilization ratio to be under 30 percent, which you can calculate by dividing your credit limit by your current debt.
If your credit utilization ratio goes above 30 percent, it shows lenders that you can’t manage your credit effectively.
Instead, stop, take a breath, and speak with your card issuer, a credit repair company, or a debt settlement company to come up with a debt repayment plan so that you can work towards catching up on past-due accounts and getting your credit history up to date.
Paying down your debt can be one of the best ways to save money, too.
Dispute Any Errors on Your Credit Report
Seeing a late payment history on your credit report or a low credit score isn’t pleasant, but the truth is that most of the stuff on your credit report is going to be a reality.
If you are looking through your credit report and you notice something that shouldn’t be there or several serious mistakes that don’t match up with your records, you need to immediately dispute these errors on your credit file to a credit reporting agency.
In some cases, these may be minor errors on your credit report that are simple mistakes, and you can remedy these yourself by reaching out to the credit bureau to take care of these credit inquiries to improve your poor credit.
Make sure to keep an eye on your credit report moving forward so that you can deal with these issues should they come up and prevent you from getting your mortgage.
Avoid Making Purchases on Credit
Many people view their credit cards as loans they can use to pay for things they can’t afford yet.
This mindset is what plunges many into debt. If your credit score is already low, this is the last thing that you want to do if you’re trying to improve bad credit.
Instead, aim to treat your credit card as if it were a debit card. If you can’t immediately pay off the item that you’re using your credit card for, don’t use it to pay for that item.
Another thing that you should avoid doing is using your credit card as a way to get a cash advance. While this may not be an issue for secured credit cards or student cards, cash advances are similar in nature to payday loans: expensive with high-interest rates.
Put simply, you shouldn’t use your credit card as a way to access funds you don’t have. Rather, focus on its use as a tool to help you develop a better credit history. Only spend what you’re capable of paying back immediately.
Make Sure That You Have a Good Credit Mix
In order to maintain a good credit score and land a mortgage, it’s important to have a good credit mix.
There are different types of credit?
There are! The two types of credit accounts that you’ll encounter are installment accounts and revolving accounts.
Installment credit has a specified end date and provides you with the full installment loan upfront. You’ll be expected to make fixed payments until the loan has been paid off. Some common examples of installment debt include mortgages, personal loans, and student loans.
Meanwhile, revolving credit lacks an end date. Instead, you can pay off a certain amount and continue to utilize available credit as you please. As you may have already guessed, this is the type of credit account that you receive when you get a credit card.
In order to boost your score, you should have a mix of credit accounts, for which mixed accounts make up 10 percent of your FICO credit score calculation. At the very least, you should have one installment loan and one revolving credit account.
Why? Having a mix of credit types shows lenders that you’re capable of managing multiple types of credit at a time.
It also helps to manage multiple credit accounts. In fact, people who had FICO scores of 850 had 6.4 credit cards on average, a major increase from the 3.8 national average.
Does this mean that you have to open more accounts or go into debt to raise your credit score? Definitely not! Always do your due diligence and only open accounts that are going to lead to a higher credit score without making it impossible to stay on top of your debt.
To put it all together, here is some actionable advice. It’s the same advice that I give to people on my personal finance blog Digital Honey.
If you have a limited credit history, one thing that you can do is get a credit card. If you don’t yet have three credit cards, get however many you need to have three in total.
Then keep a small balance on them (less than 10%) and make monthly payments. Within 6 months, your credit score should be way higher!
A high credit score is crucial if you need a mortgage loan, but not everyone has the scores that lenders need to approve a mortgage, leading some to turn to rent to own scams. Put simply, building credit is the best way to go.
If you can relate to the above, use the tips in this guide to work towards a better score and help you get the loan and mortgage rates you need!
Read the Entire Credit Series
- Is it Possible to Get Bad Credit Home Loans?
- Which Factors Most Influence Credit Score?
- How to Get Peer-to-Peer Online Loans with Bad Credit
- How to Get a Peer Loan on Bad Credit Now
- How to Start a Business on Bad Credit
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.