Tips to Improving Credit as a Homebuyer

In today’s fast-paced market, if you see a property you like, you need to be prepared to act fast. That means getting your credit score in order and being preapproved for a mortgage loan before you start looking for a home.

There’s no single magic number when it comes to the credit score needed to buy a house, mostly because credit scores for mortgage loans vary depending on the loan type and other factors. But one thing is certain: a higher credit score comes with multiple benefits for home buyers, so you want yours as high as possible, but first...

What Exactly Is a Credit Score?

Any deep dive into credit scores starts with FICO. FICO scores are named after Fair Isaac Corporation, a data analytics company that in 1989 created the first widely applicable credit score system—the most commonly used in today’s lending marketplace. In fact, “credit score” and “FICO score” are used interchangeably these days.

FICO scores are determined using information collected by the three main credit bureaus: TransUnion, Equifax, and Experian. The calculation is based on five different categories, which each carry different weights:

• Payment history for all credit accounts: 35%
• The portion of your available credit that you’re using: 30%
• How long you’ve had an active credit profile: 15%
• The mix of credit types you have: 10%
• Your recent credit activity: 10%

Using your FICO score, lenders can quickly evaluate your creditworthiness, or your ability to repay a loan, when deciding whether or not to extend a mortgage loan or credit card to you. The credit score range for FICO scores stretches from 300–850, and is broken down into five categories:

• 800 to 850: Excellent credit
• 740 to 799: Very good credit
• 670 to 739: Good credit
• 580 to 669: Fair credit
• 300 to 579: Poor credit

Benefits of a High Credit Score

You might think that when someone asks, “What is a good credit score to buy a house?” or “What credit score do you need to buy a house?” the answer is: Anywhere within the ‘excellent’ credit score range of 800 to 850. And for the most part, that’s correct.

If you have good credit, then…

• You’ll pay a lower interest rate on your mortgage loan because the best rates are reserved for applicants with the highest FICO scores.
• You’ll pay less on homeowners insurance because your FICO score is typically factored into your rate.
• If you have a low down payment and need private mortgage insurance, you’ll pay a lower monthly premium.

But even if you don’t fall within the ‘excellent’ credit score range, a FICO score in the very high 700s can still qualify you for some of the best (lowest) mortgage rates, if your overall financials are in good shape.

Check Your FICO Score

Now that you better understand the nuts and bolts of credit scores, it’s time to check yours. This should be your first step in the home-buying process—and you can even begin checking years before you start house hunting, because the more time you take to build good credit, the higher your FICO score will be.

If you’re wondering how to get a credit score, it’s easy—simply request and review your credit reports from each of the three major credit reporting bureaus. Federal law requires each of these organizations to offer you a free credit report once per year, so take advantage of this benefit. The best way to check credit scores is to visit annualcreditreport.com to request your annual credit reports, rather than contacting each bureau individually.

Once you receive your credit reports, thoroughly check each one for any errors or inaccuracies. Are the addresses, accounts, and balances accurate? Are there accounts you don’t recognize? If you find a mistake, contact the credit reporting bureau and file a dispute.

Steps to Improve Your FICO Score

If, after reviewing your credit reports, you find that your FICO score isn’t as high as you’d like, and you’re wondering how to raise your credit score, you have several options to help you:

1. Pay Your Bills on Time

Because your payment history (whether you pay on time or late) is the most important factor for determining your FICO score, get in the habit of paying before your due date. In fact, if you look up “how to increase credit score” in your web browser, you’ll see that the most common advice is to pay your bills on time. Consider setting up autopay on your accounts so you don’t have to think about manually making the payments. Caveat: If you do this, you’ll have to be more diligent about checking your transactions for possible fraud before they are autopaid.

2. Pay Your Balance in Full

Be sure to pay all your bills in full. Paying the minimum amount is never a good idea because you’ll rack up interest charges and you’ll always carry a balance–and your FICO score will suffer as a result.

3. Keep Your Balances Low

To help you pay your balances in full, keep them low. If you’re serious about learning how to raise your credit score, this is critically important. To get a good credit score for mortgage loans, you want to keep your debt as low as possible.

4. Make a Budget—and Stick to It

When you think about what credit score is needed to buy a house and how to improve your credit score, start by adopting healthy financial habits like budgeting. Budgeting is the best way to maintain consistently low balances on your bills each month. Set up a spreadsheet with your monthly household expenses and track where your funds are going. Adjust as necessary to build a manageable budget that you can live within.

5. Open Credit Only When You Need It

The older the age of your open credit card accounts, the better it is for your credit. In other words, establish credit early by applying for a credit card, and then use it wisely. Having multiple credit cards doesn’t necessarily help you improve your credit score for mortgage loans. You may think that with more cards, you’ll have access to more credit, but it can be hard to manage multiple cards and due dates, and you’ll still need to pay each one off each month.

Adopting smart financial habits like these is the best way to improve your FICO score and keep it consistently high. And remember, raising your credit score can take time, so be suspicious of any services that claim to be able to fix your credit overnight.

So… What Credit Score Do You Need to Buy a House?

It depends, because there are many kinds of loans, and the minimum credit score for mortgage loans varies depending on the type of loan for which you qualify. The credit score needed to buy a house when using a conventional loan, for example, typically requires a credit score range of 620-660— and ideally, you’ll have a 20% down payment or more. If you have less, you’ll need private mortgage insurance.

The credit score needed to buy a house using an FHA (Federal Housing Authority) loan, which is a common loan type among first-time home buyers, requires a minimum credit score range of 500-580. To qualify for an FHA loan, you’ll need at least a 3.5% down payment if your score is 580, and at least a 10% down payment with a credit score range of 500–579.

There are also VA loans, USDA loans, and others. Each has its own minimum credit score range and other requirements. VA loans, for example, are reserved for active military service personnel and veterans. And USDA loans, backed by the US Department of Agriculture, are for home buyers targeting properties in rural areas. If you’re interested in any of these, you’ll find that the credit score needed to buy a house will vary according to the loan. While these loans can be helpful if your credit score isn’t stellar, keep in mind that when your score is higher than the minimum required, you’ll save money in the long run by paying less in interest.

Next Steps

Once you feel that you have an optimal credit score for mortgage loans, it’s time to start looking for a mortgage lender for preapproval. The preapproval process tells you how much you can borrow, the interest rates you qualify for, and the different mortgage options that are available to you. With that information, you’ll know how much house you can afford, making your search more efficient. A preapproval letter in hand also sends a message to sellers that you’re a serious buyer and allows you to make an offer quickly if you see something you like.

Take the time to find a reputable lender who listens to your needs. If you already have a good relationship with your bank, you can start there. Consider getting recommendations from friends, or family members who have recently purchased property in your area, or from local real estate professionals. A good loan officer can make or break your home-buying experience, so it’s important to find one that you like and trust.

Remember, buying a home is one of the most significant purchases you’ll make. Requesting and checking your free credit reports, and trying your best to raise your FICO score to a credit score range you’re happy with, are smart steps toward a rewarding home-buying experience.

Add Home Warranty Protection to Your Purchase

Once you’ve purchased your home, it’s time to protect it with home warranty coverage. A home warranty is different from homeowners insurance, and as a new homeowner, it pays to understand the difference. When a covered household appliance or system—like plumbing, electrical, or HVAC—stops working properly, a home warranty can help protect your budget from costly repair/replacement costs. Learn more about our home warranty coverage and the convenience and peace of mind it provides. And keep in mind that when you buy a new home, you’ll qualify for special pricing and expanded coverage from First American. Simply purchase coverage within the first 60 days of your closing date. See what’s covered in our home warranty plans for home buyers.

If you’re a current homeowner, you can also get a personalized home warranty quote.