To be considered for a mortgage you will need a credit score of at least 660, but to access the lowest interest rates you will need your score to be at least 740. For example, a 100 or so point higher credit score saves an average of $60,000 less in interest for a 30 year fixed-rate mortgage on a $500,000 home—but this can vary on a variety of factors. Here are 5 ways you can improve your credit score before you buy a home.
Check Your Credit Annually
It is important to check your credit report and scores at least once per year. What you are looking for are any errors on your report and any bad debts that have been on your report long enough that it’s time for them to be removed—typically 7 years. While your score and report may vary from each of the 3 credit bureaus (Equifax, Experian, and TransUnion) they are likely to be somewhat similar. If you find an error, like a debt that is not yours, file a dispute to have it removed.
No More Late Payments
Late payments account for 35% of your credit score so your goal is to pay all your debt on time from here on out. This number is typically calculated over the last 12 months so the sooner you start being timely the better.
Pay Down Your Debts
Your debt-to-credit ratio accounts for 30% of your credit score. This means you need to aim to have as much open credit as possible. Create a debt payment plan to pay off the smallest cards first. If you have substantial debt work with a financial advisor to create a long-term financial strategy.
Keep Paid Accounts Open
The remaining 35% of your credit score is calculated by the length of your credit history, the diversity of your credit accounts, and how many new accounts you have. While opening a new account can improve your debt to credit ratio, it will decrease the overall length of your credit history—so be mindful of every new account you open. And once accounts are paid in full keep your line of credit open. If you open a new line of credit it should be with the goal of utilizing the card for emergency purposes only, diversifying your credit, or to improve your on-time payment percentage by paying the balance on-time and in full each and every month.
Build Your Cash Cushion
While your primary goal is to boost your credit score to lower your interest rate, you must also start saving for the down payment on your new home. Whether your credit is mid-range or high, the more you can put down the less you will pay in interest.
When you are ready to buy your new NoVA home we invite you to reach out to the team at Jerry Sardone Realty. We’ve served our community for over 50 years and will guide you through the buying process every step of the way—helping you find your dream home!