A higher credit score will lower your mortgage interest rate and give you more buying power. Since the COVID-19 induced recession, buyers are finding that some credit scores that were previously sufficient to qualify for mortgages are now inadequate. And if you’re torn between buying or renting, your credit score might make the decision for you. Read on to learn some great ways to raise your credit score before buying a home.
My Mortgage Insider explains,
“The Federal Housing Administration, or FHA, requires a credit score of at least 500 to buy a home with an FHA loan. A minimum of 580 is needed to make the minimum down payment of 3.5%. However, many lenders require a score of 620 to 640 to qualify.”
In reality, marginal borrowers may find that a 640 credit score is the absolute minimum required for a conventional loan. Therefore, it’s critical to raise your credit score before beginning the home buying process, and here are seven ways to do that.
1. Read Your Credit Report
First, get a copy of your credit report and correct any errors. Although you frequently hear and see this advice, it’s a good first step. There are many credit report errors that can lower your score like:
- Accounts that you have paid off that still show open balances.
- Zombie debt like a 20-year-old bounced check that a subsequent creditor has recently purchased.
- Incorrect derogatory information such as dismissed lawsuits.
- Accounts that don’t belong to you.
- On-time payments listed as late.
- Someone else’s credit card account reported as yours—could be caused by identity theft.
2. Dispute Those Errors
If you do locate some of the above issues, you need to act. Realtor Darren Robertson tells us,
“Legitimate errors can be deleted from your credit report by disputing them with the three major credit bureaus. You can do this online or by mail, and sometimes mail is actually easier, because online disputes can be tedious. At any rate, if you get errors removed from your report, your credit score will go up.”
3. Pay Down Debt
At least 30 percent of your credit score consists of the amount of credit you have versus the amount you are using, and this is called your credit utilization ratio. Different sources will quote different percentages, and The Wallet Hub suggests that
“The best credit utilization ratio is 1% to 10%. A good credit utilization ratio is anything below 30%.” While a credit utilization ratio of 1% may be impossible for most folks, do your best to at least get your ratio below the magic 30% mark.
4. Raise Your Ratio Another Way
If you have maxed out your credit cards and your ratio is high, first inquire if you can get some credit limits raised. If you are successful, your ratio will be lowered, and your credit score will reflect that. Of course, if you are mired in debt, your low credit score could prevent you from obtaining credit line increases but if you have a relative with great credit and that relative will either get a new card and/or add you as an authorized user to one of their existing cards, you can benefit from a credit line increase. Remember that when you are added to someone’s card as a user, they are liable for any amounts you charge.
5. Attack Collection Amounts
If you really want to raise your credit score before buying a home, avoid collection accounts. Even those over four or five years old can take 50 points or more off of your score.
Collections will stay on your account for seven years but if you settle and/or pay them off, their effect will begin to wane. Since many collection accounts reflect balances that were purchased by a collection agency for pennies on the dollar, negotiation is possible, and you probably can pay these accounts off for substantially less than the face amount.
6. Transfer a Balance but Don’t Close the Account
If you are lucky enough to be offered a new card with a good balance transfer option, take it, and move balances from your higher interest cards to the new account. Then, instead of closing those now zero-balance accounts, keep them. Your credit utilization ratio will improve and so will your score.
7. Beg Lenders to Be Nice
Finally, if you have a late payment that still shows on your credit report years after you have settled an account, call the credit card company, beg for forgiveness, and politely ask them to remove the account from your credit report. Remember, even if you have paid an account, past due references can appear on your report and cause damage for at least seven years, and credit card companies do have the power to remove those derogatory items.
As we have mentioned, raising your credit score before buying a home is seriously important, much like understanding transfer taxes and other home-buying costs, so get to work on it today!