Knowing how to build credit to buy a house can give you a serious advantage when it comes to homeownership.
Your credit scores and credit history are key factors in getting pre-approved for a home loan. Understanding how to build credit can help you achieve your homeownership goals faster and make smart decisions throughout your financial life.
Fortunately, you don’t have to learn how to build credit to buy a house on your own. In addition to the tips offered in this article, your Fairway loan officer can help you create a plan for improving your credit score and boosting your chances of buying a home or can refer you to our team of credit analysts.
Why your credit score matters when buying a home
Your credit score is one of the first things a lender will look at when you apply for a mortgage.
Each loan program has credit score requirements borrowers must meet in order to qualify. Lenders can also set their own requirements on top of the program guidelines.
Here are the minimum credit score guidelines for common mortgage loans:
- Conventional loans: 620
- FHA loans: 580
- USDA loans: 640
- VA loans: 580
A few quick notes, though: A 580 credit score is required to qualify for an FHA loan with 3.5% down. But you may qualify for an FHA loan with a credit score of 500 if you can make a 10% down payment. And the FHA allows borrowers to use gift funds toward their down payments.
The USDA and VA minimum credit scores are guidelines for lenders. But the USDA and VA also give lenders the flexibility to approve homebuyers whose scores are lower but who are otherwise qualified for a loan.
And if your credit score is on the low end, it’s still worth contacting a lender. Your loan officer may be able to work with you to get your credit score to a qualifying range. That may take a few months, or even longer. But having a plan will keep your home-buying goals on track.
Credit scores and interest rates
Your credit score can affect the interest rate you receive. Generally speaking, borrowers with higher credit scores tend to qualify for the more competitive interest rates. But rates are highly dependent on the borrower’s overall financial profile, as well as current market conditions.
Because interest will be a part of your monthly payment, a higher interest rate means you’ll have less money to put toward the principal of your home. That can affect how much you’re pre-approved for – in other words, how much you can borrow to buy a home.
So, the higher your credit score, the better your chance of qualifying for a mortgage, getting a competitive interest rate, and being pre-approved for the amount you need to buy the home you want.
Additionally, the USDA manufactured home loan program is set to expire on Nov. 4, 2024. The USDA could potentially extend the program at that time. But if you’re interested in buying manufactured homes with USDA loans, now is the time to connect with a lender and find out if you’re eligible.
6 tips for building credit BEFORE you apply to buy a house
Request and review your credit report for free
If you are not already doing so, make it an annual goal to request and review your personal credit report from each of the three major credit bureaus at www.annualcreditreport.com. There is no cost for you to do so.
The Consumer Finance Protection Bureau, also known as CFPB, offers a Credit Report Review Checklist you can use to help you find errors in your report. If you do find any errors, you will want to follow the dispute process to get them corrected.
Dispute errors on your credit report
A recent Consumer Reports investigation found that more than one-third of consumers find errors on their credit reports. Some of these errors are minor, but others can have a major impact on your credit score and your ability to borrow money to buy a house.
Luckily, it’s easy to dispute errors on your credit report. All three credit bureaus — Equifax, Experian, and TransUnion — allow you to dispute errors online. You can indicate the reason for the dispute, and the credit bureau will investigate.
When you dispute an error, the credit issuer is required to investigate and determine if your dispute is legitimate. If they determine a genuine error or inaccuracy, it must be removed from your credit report. The dispute process generally takes about 30 days to be resolved.
Pay your bills on time
Your payment history is the most important factor in your credit score, making up 35% of the calculation. As a result, even one missed payment can have a major impact on your credit score. So while it sounds simple, paying your bills on time each month really is the best way to maintain a good credit score.
If you struggle to pay your bills on time, set up autopay to ensure you never miss a payment. And if you already have late payments or delinquent accounts on your credit report, get them resolved as quickly as possible so your credit can start to recover.
Pay down credit card debt
Your credit utilization — or the percentage of your available revolving credit you’re using — is another important factor in determining your credit score. It makes up 30% of the calculation. In general, you should keep your credit utilization below 30% (though lower is even better). If you currently have credit card debt, you can likely boost your credit score by paying off some of that debt.
Increase your credit limits
We’ve talked about how reducing your credit card debt can also reduce your credit utilization. But the other piece of the equation is your credit limit. Because your utilization is based on the percentage of your available credit that you’re using, you can also lower that percentage by increasing your available credit.
Some credit cards automatically increase your limit over time with on-time payments being made. However, you can also request a limit increase by calling your creditor’s customer service number or even directly in your online account.
Avoid new debt
Some people try to boost their credit score to buy a home by opening a new credit card, thinking this will help them reduce their utilization and lengthen their credit history. And while this may be true in some cases, it’s important to take caution before using this strategy.
Opening new accounts immediately before applying for a mortgage could indicate red flags to a lender. If you’re 6-12 months out from applying for a mortgage, opening a new credit card could be helpful. But if you’re closer than that, try to avoid new accounts. When in doubt, talk to your loan officer about whether opening a new account will help or hurt your home-buying profile.
Don’t close paid accounts
Once you pay off an account, you may be tempted to close it, but the best thing you can do is leave the account open, especially when it involves a credit card. To get the most score benefit from credit cards, it’s best to keep each account open and use it sparingly, at least every month. The minimal activity will assure the account is considered in credit scoring as it ages and the low balance to credit limit ratio will help contribute to 35% of your credit scores.
Related reading: Are There Different Types of Credit Scores? Yes. Here’s What You Should Know.
How to build credit to buy a house FAQs
How can I build my credit fast to buy a house?
Some of the fastest ways to build credit to buy a house include requesting and reviewing your credit report, disputing errors on your credit report, reducing your credit card balances, making on-time payments, limiting applications for new credit and refraining from closing paid off accounts.
How long do you need to build credit to buy a house?
The amount of time it will take you to build your credit to buy a house depends on where you’re starting from.
If you are starting with no credit, you will need at least one account opened for six months or more, and one account that has been reported to the credit bureau within the past six months. The minimum scoring criteria may be satisfied by a single account or by multiple accounts on a credit file.
If you have existing credit and want to increase your credit scores, give yourself at least three to six months to boost your score, possibly longer depending on the exact circumstances.
What credit score qualifies you to buy a house?
The score you’ll need to buy a home depends on the type of mortgage you plan to use. You can qualify for an FHA loan with a score as low as 500, but Conventional loan borrowers will need a score of at least 620.
The bottom line on building credit to buy a house
Building credit to buy a house can take time, depending upon what your credit score is today. But you don’t have to figure it out alone. Working closely with your lender will provide you insights into exactly which steps will be most effective for raising your score and will bring you that much closer to purchasing your home.
Fairway is not a registered or licensed credit repair organization. The information in this advertisement does not constitute financial planning advice. Please consult a financial planner regarding your specific situation.Â
The information in this article is distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway Independent Mortgage Corporation.
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