Ever wondered what your credit score should be in order to purchase a home?
When you apply for a mortgage, your credit score is one of the strongest components when assessing your eligibility. Your credit report provides a breakdown of your credit history which ultimately determines your credit score.
Credit scores range from 300-850, with a score of 740 or above being an A+ in the eyes of the lender, qualifying you for the best interest rate available. Lenders use the middle of your three scores to determine the interest rate.
When you are in the process of house shopping, lenders will ask to pull your credit so they can provide you a preapproval letter. If this is your first entry credit pull in the mortgage shopping process, this is considered a “hard pull” and will slightly affect your credit. If you are exploring options with several lenders (which you should!), this will result in multiple pulls to your credit. Any subsequent credit pulls made within 14 days of the initial “hard pull” will be considered a “soft pull” by the credit reporting companies, which will not affect your credit.
If you’re looking for ways to improve your credit, here is a list of tips:
- Pull your credit report. You’re entitled to one free credit report annually from each of the three major reporting bureaus (Equifax, Experian, and Transunion). To obtain a copy of your credit report, go to annualcreditreport.com, click the “Request your free credit reports” button, and follow the prompts. Please note: Your free annual credit report does not include credit scores.
- Review your credit report. Make sure everything looks accurate. Errors can happen on credit reports, so this will give you the opportunity to identify any issues early in the process with time to get them corrected.
- Avoid opening any new debt (or closing any existing tradelines). Opening new debt can affect your credit score as well as your debt-to-income ratio, which can decrease your purchasing power. Closing an account can also affect your credit score, so try to leave it open even if you don’t plan on using it again.
- Keep your credit card utilization below 50%. For example, if your credit limit is $4,000, aim to keep your current revolving balance below $2,000. The lower you’re able to keep your credit card utilization, the better your credit score will be.
- Don’t miss a payment. This may go without saying, but missed payments are red flags that can stick with your credit history and lead to a reduced credit score.
- Self-report utility payments. There are several resources available that will assist you with reporting payments for your phone, utilities, and streaming services directly to the credit bureaus. As long at these payments are made on time, this will help improve your credit score.
Remember that boosting your credit score is a process and is not something that you can expect to happen overnight. Start with some of the tips above and you’ll be on your way to obtaining a loan with favorable terms and conditions.