Preparing Your Credit Score for Buying a House

Preparing Your Credit Score for Buying a House

When planning to buy a home there are two major hurdles you need to negotiate before you start house hunting: getting prequalified and cleaning up your credit report so you can attract the best interest rates. You will also benefit from having an edge over other bidders for the home of your dreams. In this blog we’ll discuss preparing your credit score for buying a house. This entails prequalifying for a home, first, and then how polishing your credit score will enhance your chances of purchasing a home you can both afford the monthly payments for and enjoy living in.

Part I: Which Comes First the Chicken or the Egg?

How does the prequalifying process work? Nobody we know has written a primer on it, but here are a couple of pointers to light your path through the prequalifying process:

  • First of all, don’t put the cart before the horse. What we mean is: don’t set your heart on a home only to find out you can’t afford the down payment, or the monthly mortgage payments.
  • Get prequalified the moment you know you want to purchase a new home, not when you start dealing with a realtor. Some folks get confused about the process, but it goes like this: your bank or mortgage lender will assess your credit situation in prequalifying you. When you finish the prequalifying process, your lender can then let you know what price range you can comfortably afford with both a down payment and monthly mortgage payments.

So now you’ve been given a reality check, you’ll set your sights on what you can afford rather than suffer disappointment when you discover the house you desire is beyond your financial means.

When you are prequalified you can be among the first bidders on a home that’s in great demand. Another reason to be prequalified is sellers often are not interested in buyers, who haven’t been prequalified.

Part II: Credit Scores and Prequalifying

As part of the prequalifying process, the state your credit is in will largely determine your success in prequalifying for a home loan.

There may be issues that could detract from your credit score being optimal. These need to be addressed. This process could take time before your credit report reflects your creditworthiness at its best. A pockmarked credit report can stand in the way of your ability to successfully bid on a home. It can also garner a favorable interest rate.

If your credit report is blemished with late payments or derogatory statements, you need a lead time of six to nine months to resolve such issues.

Standard home loans ask for a minimum of three tradelines. If you don’t already know, tradelines refer to a mixture of credit: for example, credit cards, car finance loans, student loans, etc. These credit sources must have been in use within the last one to two years. If you have under three tradelines, you can’t get a mortgage. So in order to qualify you will need to get more credit with a major card issuer like MasterCard, Visa, or Discover. You must also establish a track record with your new credit cards: at a minimum of six months of purchases.

When you charge on your credit cards don’t use up in excess of 30% of your credit limit. And it’s a good idea to pay the entire balance every month.

Another way to enhance your credit score is to not close older accounts, even if you use them infrequently. In fact, put some purchases on them every now and then, and pay them off. This shows lenders you can handle credit cards wisely.

Credit Bureau Risk Logic

We’ve advised you to open new credit cards to convince lenders you’re a good credit risk for a home loan. Also, do not open new credit cards within six months of prequalifying for a mortgage. Why? Because credit bureaus can’t predict in advance you’ll responsibly manage new credit cards, and they’d rather not take the risk. Instead they’ll lower your credit score.

Up to the point your funds are in escrow, don’t chance exceeding 30% of your credit limit. This is even though you want new items for your new home. It could backfire and you’ll lose your loan. Put all new big ticket items on hold until your loan has been closed.

Knowing the rules of prequalifying, and how to maximize your credit score will give you a leg up on the competition when bidding on a home you’re dying to live in. And being confident you can comfortably negotiate the asking price and afford the mortgage payments.


What Credit Score Is Needed To Buy A House?

What Credit Score Is Needed To Buy A House?

There’s no one answer for this question. As a rule of thumb, the better your credit score, the better your interest rate. And the better your interest rate, the lower your monthly payment. Here’s what you need to know about what credit score is needed to buy a house.

For example, here’s a table from FICO about how your credit score translates to your monthly payment. Assume that you have a 216,000 30-year, fixed-rate mortgage:

Your FICO ScoreInterest RateMonthly Payment
760 – 8503.97%$1,028
700 – 7594.19%$1,055
680 – 6994.37%$1,078
660 – 6794.58%$1,105
640 – 6595.01%$1,161
620 – 6395.56%$1,235

You can see that while it is still possible to get a mortgage on a home with a FICO score of 620, you will end up payment $207 more a month. This is $2,484 more a year and $74,520 more interest over 30 years. That’s a lot more interest!

To avoid this, it’s best to get your credit score as high as possible to ensure the best mortgage rates for your home purchase. Even if you think that your FICO score is fine, there may be errors that you should clear up before applying for a home loan. While addressing the errors may be annoying, it’s much better than dealing with them before applying for a loan than in the middle of buying a home.

If you want real numbers to strive for, you should aim to have a credit score of 740 or higher. This will allow you to get the best loans and interest rates. On the other end of the spectrum, it’s very difficult to get a mortgage with a credit score under 620. If that is your situation, it’s best to wait and increase your credit score before trying to secure a mortgage.

If you’d like to learn more about how to repair your credit, view your Credit Repair Guide.

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