There are a lot of things to think about if you are planning to purchase a new home, but perhaps the single most important thing to know is your credit score. Your credit score determines the interest rate you will get on the loan, and since most mortgage loans will last at least 30 years, even small fluctuations in the interest rate can add up to tens of thousands of dollars in interest savings (or costs) over the years. An excellent credit score is anything over about 720, and anything under about 620 could be cause for concern.
About six months before you want to buy a home, take some time to look at your current credit reports and get your credit score from the three major credit reporting agencies—Equifax, Experian, and TransUnion—so you can identify any discrepancies and get them corrected if possible, and so you will have some time to boost your credit score before you go in to close your loans. If you do need to improve your score, here are four ways to do it.
1: Pay All Your Bills on Time
Lenders want to know that if they give you the money to purchase your home, you will be able to make your monthly payments, and you will make them on time. To check on how reliably you pay your bills on time, they’ll look at your past credit reports. If you have several months of late payments, missed payments, and other red flags, that will hurt your score and also hurt your chances of being approved for the loan. Be sure to pay all your bills on time—even if it’s just the minimum payments—so your payment history is clean.
2: Pay Down Existing Debt Balances
Another thing that lenders will look at is how much other debt you have. While you may not be able to do much to pay off things like car loans and student loans right now, you should do what you can to pay down balances on credit cards, store cards, and similar revolving credit lines before you apply for a loan. If you carry large monthly balances, even if you pay them off each month, that could also hurt your score, so try to pay them off in smaller chunks toward the beginning of the payment period rather than large chunks all at the end. Also check if you have small balances spread over several cards, as this can count against you. Pay off those “nuisance balances” as soon as possible and charge everything to a single card.
3: No New Major Purchases
If you just got a promotion at work or a new job that pays more, you might be tempted to go out and celebrate with a new car, some new furniture, or another major purchase. The problem is that every time a lender checks your credit, there’s a hit to your score that could last for about a year. Don’t splurge on those new purchases until after you get approved for your home loan, especially if your score is on the lower end of being considered good credit.
4: Avoid Red-Flag Behaviors
Lenders don’t like risk—not even a hint that you might be a risky borrower. For that reason you should avoid any behaviors that could raise red flags, such as suddenly missing payments or spending significantly more than your average monthly expenses near the time of your loan approval. Taking out a cash advance, or using cards for expenses at a place like a divorce attorney or a pawn shop could also be a signal that you are more likely to have money troubles in the near future. Even if that’s not the case, it’s not worth the risk that it could affect your loan and you should avoid it.
A credit score can be confusing, but knowing what can cause it to go up (or down) can help you plan to have the highest possible score when you apply for a mortgage loan.