How to improve your credit score to receive approval for a home loan

The process for buying and owning a home starts long before you express interest in a property. As they say in the accounting industry, you have to dot the Is and cross the Ts to ensure you have your financial house in order, before you can seal the deal on your dream home. At the center of your financial world sits your credit score, which plays the most important role in determining not only the price range of the properties you have under consideration, but also the interest rate you can expect to pay on taking out a home mortgage loan.

Nearly 50% of American home buyers work to improve their credit scores, before they apply for home financing.

How FICO scores impact the interest you pay on a loan

A Higher FICO Score Saves You Money
Type of loan Loan principal amount Your Credit Score
FICO Score APR Monthly Payment Total interests paid
760-850 3.608 $455 $63,834
700-759 3.83 $468 $68,360
680-699 4.007 $478 $72,015
660-679 4.221 $490 $76,488
640-659 4.651 $516 $85,651
620-639 5.197 $549 $97,613
Your Credit Score700-759
If your score changes to 760-850, you could save an extra $4,526
If your score changes to 680-699, you could pay an extra $3,655
If your score changes to 660-679, you could pay an extra $8,128
If your score changes to 640-659, you could pay an extra $17,291
If your score changes to 620-639, you could pay an extra $29,253

What is a Credit Score?

More than 90% of lenders refer to what is called a FICO score to determine your credit worthiness. A FICO credit score provides lenders with enough information to stamp your home mortgage loan with a “Yes” approval or a “No” denial. The range for a credit score starts at the low point of 300 and rises to the high point of 850. A FICO credit score at least 740 means you have “excellent” credit. Three national credit bureaus-Equifax, Experian, and TransUnion-provide credit scores for both lenders and borrowers. Typically the three credit bureaus present similar credit scores, but you can receive credit scores that differ substantially between Experian, TransUnion, and Equifax.

What is the Credit Score You Need to Buy a Good House?

The credit score for home loan approval varies, depending on the type of mortgage loan you plan to use to finance your dream home. For a federally backed FHA loan, the average credit score to buy a house is about 580, which includes a low down payment of 3.5% of a home’s value.

Down Payment based on your credit score

Type Min. Credit Score
Financial 620
Private Lenders 640

For Freddie Mac or Fannie Mae government financing, you need a minimum credit score for home loan financing to be 620. Private lenders typically approve minimum credit scores for first time home buyers between 600 and 640, although during the home buying frenzy that preceded the great recession of 2007-08, a credit score of 550 – 600 secured a home loan.

What is a Good Credit Score for Buying a House?

The three primary credit reporting bureaus take five factors into consideration for calculating your credit score. Your past credit payment history comprises 35% of your credit score, with the amount owned on outstanding balances representing the second most important factor that determines your credit worthiness. The length of your credit history, the amount of recently issued credit, and the type of outstanding credit balances round out the factors that the three major credit bureaus use to determine your credit score. A good credit score for the approval of a home mortgage loan is 650, which reduces your down payment and the interest rate charged by a lender.

How Do I Get the Best Mortgage Rates Based on My Credit Score?

The goal of securing a home mortgage loan should be to receive financing at the lowest possible interest rate. You cannot accomplish this by negotiating with a lender; you need to present evidence of your credit worthiness. A credit score of 740 or higher qualifies you for the most affordable home mortgage loan interest rate. With even a low down payment on a home, borrowers who possess sterling credit scores at or above 740 receive the most favorable interest rate charges on home loans.

One percentage of the credit score’s point makes a huge difference

*Monthly principal and interest payments on a 30-year fixed-rate mortgage for $200k

Interest rate Monthly payment
4% $954
5% $1,073
*You can use our Mortgage Calculator to estimate your monthly payments based on interest rate.

Why it’s Important to Improve Your Credit Score

Mortgage loan lenders set interest rates on loans by primarily referring to your credit score. Higher credit scores invariably lead to more favorable interest rates for home mortgage loans. Although you do not need to have perfect credit to buy a house, you need near perfect credit to receive the lowest financing charges for a home mortgage loan. Home mortgage lenders have implemented stricter lending practices since the financial meltdown of 2007-08, but that does not mean lenders have pulled the plug on borrowers who possess less than perfect credit scores.

How do I improve my credit Score before buying a home?

As we mentioned earlier in this post, you need to get your finances in order, before you start the home buying process. This means improving your credit score to receive the most favorable mortgage loan terms possible. How do you improve your credit score?

Let us count the ways.

1First Things First You have to learn about credit issues, before you apply for a home mortgage loan. The first thing on your home buying list involves requesting a copy of your credit report from each of the three major credit bureaus. Under the federal government FACT Act, you have access to one free credit report per year from Experian, Equifax, and TransUnion.

2Now That You Have Your Credit Report… …What do you do? The simple answer is to make sure your credit report is 100% accurate. Lenders reject a whopping 25% of home mortgage applications because of mistakes made on calculating home buyer credit scores. The Federal Trade Commission (FTC) reported in 2015 that more than half of the home buyers that disputed credit report information still had at least one error on their credit reports after eliminating most of the other errors. Make sure your personal information, such as birth date and Social Security number, is accurate. Then, confirm that all of your credit accounts appear on each of three major credit bureau records. Many home buyers discover missed payments listed on credit reports, when they never missed a payment on the listed accounts. If you do not recognize one or more of your accounts listed on a credit report, you should take immediate steps to contact Equifax, TransUnion, and Experian.

3Reduce Your Debt Reducing your debt goes a long way towards helping you secure the most favorable home mortgage loan terms. Credit utilization, which is the amount you can borrow and still pay off the debt you have amassed, comprises almost one-third of your credit score. Therefore, you should make debt reduction the focal point of your home mortgage loan acquisition plan. Liran Amrany, who is the founder and CEO of Debitize, said the most effective method for maximizing your credit utilization involves charging for products on a credit card and then paying down the debt to just one percent of your credit limit before your bank issues a report to the major credit bureaus. You can reap the benefits of reducing your debt within 30 days.

4Pay Your Bills on Time Home mortgage lenders do not simply look at a number to determine your credit worthiness. Lenders also review the underlying reasons for the establishment of your credit rating. If your credit score red flag is not paying your bills on time, you can expect most home mortgage lenders to toss your application into the trash. Kevin Gallegos, who is the Vice President of Phoenix Operations from Freedom Financial Network said in a recent interview that paying bills on time represents the most important factor in calculating a credit score. From shedding the bad habit of paying credit card bills late to sending money before the due date, you should see an immediate improvement in your credit score.

4Open a New Credit Account Amrany advises prospective home buyers to open a new credit account to bolster their credit scores. Opening up a new card augments your outstanding line of credit, which means your credit utilization will improve. First time homebuyers that have one or two open lines of credit enhance their credit mixes by opening up a new credit account. Within six weeks, you should enjoy a higher credit score by opening a credit account. Just make sure to stay current with the new credit account debt obligation.

5A Secured Credit Card Improves Your Credit Score A secured credit card represents a credit card that requires you to make a deposit that creates your maximum balance. The initial deposit ensures the creditor can recoup any outstanding debt you run up on the credit card. Secured credit cards appeal especially to home buyers that need to boost credit scores by establishing a pattern of paying back debt on time. Some methods for improving your credit score are nothing more than myths that can derail your goal of financing the purchase of a home. One such method involves adding payment histories to your credit report. Although you can request TransUnion, Equifax, and/or Experian to include your cell phone payment history within your credit report, the chances are slim to none that any of the three credit bureaus will agree to your request.

While the three major credit bureaus have taken steps to include monthly bill payments such as utility bills in the calculation of your credit score, most consumer credit analysts agree with Gallegos. Each of the three primary credit bureaus plan to include more monthly bill payments into calculating your credit score, but expect the changes to be slow and if anything, your utility bill payment history will show up only on credit reports that display delinquent payments.

Questions & Answers 2
  1. Good day can I get a home loan of R100 000 if my credit score is 576
  2. What if I have credit reporting in someone else’s name from another state. There is,a mistake on my credit reporting, how so I fix this?
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