You know exactly what you want in your first home—a four-bedroom property in a prime neighborhood with a top-notch school district. But before you can get a mortgage to buy that ideal house, you likely will need to improve your credit score.
If you’re borrowing money to purchase a home, your lender wants to know that you’ll be able to pay it back in a timely manner, and your credit score is an easy way to estimate those odds. Here are some helpful tips to get your credit score into the best home-buying shape possible.
1. Pull your credit report
The three major U.S. credit bureaus (Experian, Equifax and TransUnion each releases their own credit scores and reports (a more detailed history that’s used to determine your score). Their scores should be about the same, but they do pull from different sources. For example, Experian considers on-time rent payments, while TransUnion has detailed information about previous employers.
You can get a free copy of these scores and reports from each credit-reporting company every 12 months at AnnualCreditReport.com. It won’t include your credit score, however, so you’ll have to go to each company for that, and pay a small fee. You also can check with your credit card company, as some offer free access to scores and reports.
Once you have your report, thoroughly review it page by page, particularly the “adverse accounts” section that details late payments and other slip-ups. Then assess where you stand. The better your credit history, the higher your score, and the better your opportunities for a home loan. The Federal Housing Administration requires a minimum credit score of 580 to permit a 3.5 percent down payment, and major lenders often require at least 620, if not more.
2. Correct any errors
Credit reports can sometimes contain errors that will harm your score. So, if you spot any, begin by sending a dispute letter to the bureau, providing as much documentation as possible, per FTC guidelines. You also will need to contact the organization that provided the bad information (such as a bank or medical provider), and ask it to update the info with the bureau. This may take a while, and you may need documentation to make your case. But once the bad info is removed, you should see a bump in your score.
3. Erase one-time mistakes
If you’ve made a late payment or two, call the company that registered the late payment and ask that it be removed from your record. Most companies will tell their reporting division to remove this from your credit report. This probably won’t work if you have a history of late payments, but for accidents and small errors, it’s a simple way to improve your credit score.
4. Increase your limits
One easy way to increase your credit score is to simply pay off your debt. If that’s not an option right now, though, you could instead ask your credit card companies to increase your credit limit. This will improve your debt-to-income ratio, which compares how much you owe with how much you can borrow.
For instance, having $1,000 of credit card debt is not good if you have a limit of $1,500; it’s better if your limit is $5,000. Although you owe the same amount, you’re using a much smaller percentage of your available credit, which bodes well when it comes to your borrowing practices.
5. Pay on time
If you often are late with payments, now’s the time to change that. You can improve your credit score by committing to always paying your bills on time. Consider signing up for automatic payments, so it’s guaranteed to get done.
6. Give yourself time
Unfortunately, negative items (such as those habitually late or nonexistent payments) can stay on your report for up to seven years. The good news? Changing your habits makes a big difference in the “payment history” segment of your report, which makes up 35 percent of your score. That’s why it’s essential to start early, so you will be sitting pretty once you’re shopping for homes and find one that’s perfect.
