Thinking of buying your first home? If you’re planning to apply for a mortgage, you better get your credit in shape now. That’s because your credit score—a number based on your credit history that represents your creditworthiness and the likelihood you’ll repay your debts—is one of the most important factors in qualifying for a mortgage.
"Mortgage lenders will use your credit history to determine the risk level associated with loaning you the money to purchase a home," said Rod Griffin, director of consumer education for Experian, a credit-reporting agency. "Having a strong credit history enables you to qualify for the best interest rates and terms available."
A lower interest rate often means you can afford to pay more for a house and still keep your monthly mortgage payments within your budget. That’s why it pays—literally–to improve your credit score before you apply for a mortgage. Here are some tips from Experian to improve your credit score:
- Order your credit report. You are entitled to a free credit report once every 12 months from each of the three national credit-reporting companies (Experian, TransUnion and Equifax) by visiting www.annualcreditreport.com. Review the report–errors are not uncommon—and correct any errors or other issues before applying for a mortgage.
- Pay up any past due accounts. Your payment history is the single most important factor making up your credit score. If you have any past due accounts, bring them current, and make future payments on time.
- Pay down your balances. Open balances affect your credit-utilization rate, an important indicator of risk. The lower the balances on your credit cards, the lower your utilization rate—and that’s good for your credit score.
- Consider ordering your credit score. If you order your credit score, you should receive with it a list of the factors impacting that score. These risk factors can help you understand what changes to make to begin improving your score.
But even if your credit score is low, don’t give up hope of owning a home. According to Experian, younger homebuyers tend to have lower credit scores than older folks. That may be because they may have fewer credit accounts, missed a student-loan payment or perhaps walked away from an apartment lease they co-signed back in college. But even people with a limited credit history can qualify for a mortgage if they prepare in advance. You just have to build credit. That’s easy to do by opening a credit-card account—and paying every bill on time. You can even open a joint account with someone who has a good credit history, like your parents. Paying your student loans diligently will also improve your credit score, as will taking out a car loan and making regular payments.
Just take your credit history seriously – and remember that bad credit can be costly. "Although it may still be possible to qualify for a mortgage loan, having a poor credit history will likely mean you will have to pay higher interest rates and fees," Griffin said. "That will result in higher monthly payments and paying more for the home over the life of the loan."