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Credit scores can be a big factor in the mortgage application process. They can affect everything from a borrower’s loan options to interest rates. The good news is that if yours could use a boost, there are ways to improve! Although everyone’s financial situation is different, here are a few suggestions on how to increase your credit score before you buy a house and insights into the type of credit score most mortgage lenders use.
Top Takeaways
Which credit score is used for mortgage approval?
You may not realize it, but there are a variety of credit scores. Most mortgage lenders rely on one type, FICO Scores, which are calculated by Fair Isaac (FICO), a data company. Some lenders may use alternatives, such as a VantageScore. Given that FICO Scores are the most widely used and have their own credit scoring model, this article will focus on them.
FICO Scores are based on information from the three major credit reporting agencies—Equifax, TransUnion, and Experian. Each agency applies the FICO scoring model to the information they have available on a borrower—which can vary—to create a score. Mortgage lenders usually focus on the middle score among the three. To see where your scores stand, visit this myFICO page on where to get your authorized scores.
Note: Industry-specific FICO Score versions are also available, including scores for mortgage lending.
Now, onto the tips to help increase your credit score.
1. Check your credit reports
Given that you may have three different FICO Scores (one from each of the three major credit agencies), it’s a good idea to check on each. Reviewing your credit report from each agency on an annual basis can help you understand what affects your score and find any mistakes or inaccuracies. Thankfully, checking on your credit may be free and easy. You can claim a free copy of your three credit reports every 12 months from AnnualCreditReport.com or by calling 877-322-8228. Additional options are available for visually- and hearing-impaired consumers on AnnualCreditReport.com’s accessibility page.
2. Dispute errors on your credit reports
Review each credit report for errors. According to a Consumer Reports study, 34% of the study’s volunteers found one or more error on their report, and certain mistakes can lower your score. If anything looks out of the ordinary, get in contact with the credit agency to resolve it. The Fair Credit Reporting Act (FCRA) gives you the right to dispute items on your report and taking the time to correct inaccurate information could boost your credit score.
One common error people look for are payments creditors incorrectly report as delinquent.* Other errors myFICO says to watch for include:
- An account that’s listed more than once: That can make it look like you have more debt or lines of credit than you do.
- “Bad” debts that haven’t been removed from your report: Look for debts that haven’t been removed in a timely manner. Example: A bankruptcy that hasn’t been taken off your report after 7–10 years, depending on the type.
- An account that’s listed as closed by the creditor: Your credit report may say an account was “closed by grantor” instead of you. That suggests you didn’t keep the account in good standing.
*Please be advised that the FCRA requires payments to be reported accurately, so if the payments were in fact delinquent, disputing them will not remove the delinquency.
3. Pay your bills on time
One of the simplest ways you can boost or protect your credit score is by making monthly payments on time. That’s because payment history makes up 35% of your FICO Score, more than any other factor. Due to this, you may want to explore autopayment options as you prepare to buy a house. In 2020, Money reported on a how a range of delinquent payments could affect a credit score. They claimed a consumer with a FICO Score of 680 could lose anywhere from 25–110 points depending on the type of bill. A lower score could potentially decrease the chances of getting the best possible mortgage interest rate from a lender.
4. Pay down debt
Debt, or “amounts owed,” make up 30% of FICO Scores. Given that, paying down debt is another way to help boost a credit score. On a related note, some homebuyers wonder if it’s best to pay off all their debt before buying a home. That will depend on factors such as how big of a mortgage you’ll want and whether you’ll need that cash for:
- Your down payment, closing costs, or other costs associated with buying your home.
- Cash reserves (extra cash on hand), which may be required by your lender.
- Other expenses after you’ve bought your home.
5. Lower revolving credit debt (like credit card debt)
One area of debt FICO credit scoring models closely evaluate is “credit utilization.” This is the percent of available credit you use across all revolving credit accounts such as credit cards. (These are accounts that let you keep using credit even after you pay it off.) Using too much available credit can give the impression that you’re stretched thin and are more likely to miss payments.
Many sources recommend keeping your credit utilization across all your revolving accounts to 30% or below for a good credit score. myFICO adds that keeping your credit utilization ratio under 10% and making on-time payments can help “build” your score. That said, FICO doesn’t recommend a ratio of 0%. That gives them “less information about how you manage money” but it also won’t cause your score to “drop significantly.”
To determine your credit utilization rate:
- Add your revolving credit accounts’ balances together.
- Divide them by your total credit limits across all the accounts.
- Multiply the final answer by 100.
Example: Julia has 3 credit cards with a total of $3,000 in balances. She has $10,000 in total credit limits. Her credit utilization rate would be $3,000 ÷ $10,000 = 0.3 | 0.3 x 100 = 30%.
6. Plan ahead
When it comes to preparing your credit score to purchase a home, it can take time. For example, as you pay down balances, lenders will typically notify national credit reporting agencies every month or 45 days. That’s according to Transunion. Also, don’t be misled by credit repair companies that promise they can fix your credit fast to buy a house. They may be scammers charging for services you could do for free or trying to steal your identity. Learn more in our blog on credit repair scams.
7. Avoid credit inquiries and closing certain accounts
While you’re focusing on increasing your credit score, don’t forget to avoid some common mistakes before you buy a house.
- Limit credit inquiries: Also, be aware that multiple hard inquiries—versus soft inquiries—in a short period of time can lower your credit score. Additionally, hard inquiries may stay on a credit score for up to two years, according to Equifax.
- Keep credit card accounts open, if appropriate: If paying the full balance on a credit card, Experian says it’s usually best to leave the card’s account open if you’re trying to boost a score. “Ideally, you should keep those accounts active by making small purchases,” and then make monthly payments in full, they add. In contrast, closing a credit card account can lower your available credit limit and may increase your credit utilization rate. If you decide it’s best to close a credit card and have more than one, consider keeping older accounts open. Length of credit history impacts 15% of a FICO Score.
If you’re thinking about buying a new home, see how we can help with cost, convenience, and a commitment to close on time. Contact one of our Mortgage Professionals to learn more about your options at 833-702-2511 or get started online.
Tradenames and trademarks used in this blog post are the property of their respective owners. Nationstar Mortgage LLC d/b/a Mr. Cooper is not affiliated, associated, or sponsored by any of these owners. Use of these names and trademarks is not intended to and does not imply endorsement, but is for identification purposes only. Information provided does not necessarily represent the views of Mr. Cooper. Information is subject to change without notice.
