Many adults who pay rent might be able to afford mortgage payments, but switching from renting to owning is a process that requires planning and forethought. If you’re considering applying for a mortgage, one of the first things you want to pay attention to is your credit report and score. Ask yourself, Is my credit score good enough to buy a house?
Typically, the lower the credit score, the higher the cost. Although borrowers with credit scores as low as 580 could qualify for an FHA loan — a mortgage insured by the Federal Housing Administration — their interest rates will likely be higher than those given to borrowers with credit scores in the 700s and up.
A lender will also look at other things on your report. For example, the presence of collection accounts or a bankruptcy on your credit report could cause some lenders to turn you away, even if you have an average or better score.
6 Steps to Boost Your Credit Score to Get a Mortgage
If you’re anxious to get your credit into shape for mortgage approval, here are some steps you can take to improve it:
1. Give yourself time
The good news is that past struggles with finances won’t automatically render you ineligible. The bad news is that a few months might not be long enough to correct old mistakes. Six to 18 months of dedication to score improvement should suffice, but the time frame is a little different for everyone.
2. Analyze your credit report
Review your credit file to identify opportunities for improvement. If you don’t understand how to read your credit report, enlist the help of a qualified credit counselor. If you find errors or derogatory accounts that don’t belong to you or are incorrectly reported, request corrections for all erroneous information. The Federal Trade Commission (FTC) recommends writing the credit reporting company and pointing out the information you believe is inaccurate.
3. Make all payments on time
Your payment history makes up 35 percent of your credit score, and no lender wants to see late payments on an applicant’s credit report. If you have trouble remembering due dates, set up automatic payments or reminders. Otherwise, your late payments can lower your score.
4. Pay down debt
A big part of your credit score is also based on the amount of debt you carry in relation to the total amount of credit available to you. Even if only one credit card is maxed out, your score could suffer. So, try to pay off as much debt as possible, including your credit cards and any other loans you might have.
5. Start small
If your score is low because your file is thin (maybe because you don’t have many credit products under your belt), get a credit card and use it to make small purchases that you can pay off monthly. Keep your credit utilization ratio around 20 percent, and ask your credit card company if you can have a higher credit limit. If you don’t qualify for a traditional credit card, start with a secured card.
6. Keep credit card accounts open
Don’t close unused credit card accounts, as that can negatively affect your credit utilization ratio. When you close a credit card account, you are lowering the total amount of your available credit. This can result in a higher ratio, which is bad for your credit.
Other Mortgage Rate Tips
Getting a mortgage at a great rate depends on more than just a good credit score. The more loan requirements you can meet, the better your rate will be. The lender will look for steady employment, low debt, a history of on-time payments and other factors. It is not necessary to be a “perfect” loan applicant in every respect. You could possibly get away with falling short on one requirement if you meet — or exceed — the others.
From GoBankingRates.com: Is my credit score good enough to buy a house?