Buying a home is exciting, but there are a few hurdles you’ll need to clear before you sit down at the closing table.

 

One of the biggest: getting approved for a mortgage.

 

WalletJoy’s 2020 Hope for Homeownership report found that 38% of Americans without homeownership plans did not believe they would ever be able to buy a home, with nearly 4 in 10 (39%) Americans feeling that getting approved for a mortgage loan was an obstacle to their ability to own a home and 33% citing their credit score, among other things.

 

While lenders take a range of factors into account for mortgage approvals – your income, your debts, and your cash savings – your credit score plays a big part in the final decision.

 

Understanding why your credit score matters and how to improve it is a vital first step for first-time homebuyers.

How Lenders Use Your Credit Score

When you apply for a mortgage, the lender will pull your credit report from each of the three credit bureaus: Equifax, Experian, and TransUnion. The information in your credit report is what’s used to shape your credit score. For FICO scores, which are the scores most mortgage lenders rely on, this includes:

 

  • Payment history
  • Credit utilization (the amount of your credit limit you’re actively using)
  • Credit age
  • Credit mix
  • New credit inquiries

 

Lenders look at your credit report, credit score, and overall credit history to gauge how responsible you are financially and how likely you are to make on-time mortgage payments. Your credit also influences the interest rate you’ll pay for a home loan. The better your credit, the more likely you are to be approved and get a lower mortgage rate.

What Credit Score Do I Need to Get a Home Loan?

The score you’ll need for a mortgage ultimately depends on the type of mortgage loan. Generally, you’ll need a 620 minimum credit score to be eligible for most conventional mortgages. If you’re not there, it is possible to go through the federal housing administration to obtain an FHA loan with a score as low as 580. If you’re looking for a USDA loan, on the other hand, the lender may require a score of at least 640.

 

A better way to think about credit score for mortgages is where you land on the credit-scoring scale. The FICO scale ranges from 300 to 850, and a good score is generally 670 or above. A credit score of 800 or higher would be considered exceptional, while a low credit score below 580 is considered poor.

 

VantageScore is another credit-scoring model that mortgage lenders might use. A good score is generally 700 or better, and 750 or higher would be excellent. VantageScores follow the same 300-to-850 range as FICO.

Improving Your Credit Score to Get a Mortgage

If your credit score isn’t as high as you’d like, don’t panic. These tips could help you raise your score as you prepare to buy a home:

1. Know what’s affecting your credit

First, check your credit report to get a sense of what’s affecting your credit score.

 

Payment history, for example, carries the most weight for credit scores. Late payments can be extremely damaging, potentially causing a loss of 100 points or more.

 

A maxed-out credit card also works against you. Part of your score is determined by how much available credit you’re using. Experts say a 30% utilization rate is good for improving your score, but the lower you can get this percentage, the better.

 

With that in mind, one of the best things you can do to improve your credit ahead of applying for a mortgage is to decrease your credit card balances. Another is consistently paying all of your bills in full and on time.

2. Dispute credit report errors

Review your credit report thoroughly. When checking your credit reports, keep an eye out for errors or inaccuracies. Credit report mistakes could be costing points on your credit score without you realizing it.

 

If you spot an error or inaccuracy, contact the credit bureau that’s reporting the information to dispute it. The credit bureau must investigate your dispute and verify whether the information is correct.

 

If the investigation determines that your claim is valid, the error must be removed or corrected. That could add a few points back to your score. Just be sure to give yourself at least three months to deal with a dispute before applying for a mortgage, as these issues can take a while to resolve.

3. Clean up old collection accounts

Old collection accounts or charge-off accounts hurt your score. And they can cause a mortgage lender to raise an eyebrow when you apply for a loan. The lender might seek a written explanation for any collection accounts before approving your mortgage application.

 

If you have any lingering unpaid debts, consider paying those off before sitting down with a mortgage lender. This can do two things for you. First, new FICO credit-scoring models don’t count paid collection accounts against you. So, paying off a collection account could help raise your score by a few points. The other benefit: It shows the mortgage lender you’re taking your financial situation seriously.

The Bottom Line on Credit Scores and Home Buying

When it comes to getting a mortgage, your credit is a big factor. With a little effort and patience, you can raise your credit score, reduce your home-buying stress, and set yourself on the path to homeowner success.