Want to Buy a Home? 8 Ways to Improve Your Credit Score Before You Apply

If buying a home is somewhere in your future—even if it's a year or two away—one of the smartest things you can do now is pay attention to your credit.

Your credit score doesn't just affect whether you can qualify for a mortgage. It can affect your interest rate, mortgage insurance and ultimately how much home you can comfortably afford.

And here's something many buyers don't realize: the credit score you see on a free credit app may not be the same score a mortgage lender sees.

Mortgage lenders typically review information from all three major credit bureaus—Equifax, Experian and TransUnion—and commonly use the middle of your three qualifying scores. So if your scores are 690, 715 and 740, for example, the 715 may be the important number for your mortgage.

The good news? If your credit isn't where you'd like it to be, there are things you can do.

1. Pay every bill on time

This is the big one.

Payment history accounts for about 35% of a typical FICO® Score, making it the single largest scoring category. A payment that's 30 days late can be reported to the credit bureaus and potentially hurt your score.

If remembering due dates is a problem, consider setting up automatic minimum payments. You can always pay additional amounts separately, but the automatic payment can help protect you from an accidental late payment.

2. Watch your credit card balances—even if you pay them off every month

Here's one of the biggest surprises for many future homebuyers.

You might charge $4,500 on a card with a $5,000 limit and then faithfully pay the entire bill every month. You may think that's excellent credit behavior—and you're certainly avoiding interest.

But depending on when the card issuer reports your balance, your credit report could show that you're using 90% of your available credit.

That's called credit utilization, and it matters.

Amounts owed, including utilization, account for approximately 30% of a typical FICO Score. Generally, the lower your utilization, the better.

If you're preparing to buy a home, consider keeping balances lower throughout the month rather than waiting for the statement due date. You can also ask your credit card company whether you qualify for a higher credit limit—but don't use that increased limit as an excuse to spend more.

3. Don't close an old credit card just because you aren't using it

That first credit card you opened years ago may be more valuable than you think.

Length of credit history accounts for about 15% of a typical FICO Score. Closing a card can also reduce your total available revolving credit, which can increase your utilization percentage.

That doesn't mean you should never close an account. Cards with expensive annual fees or accounts that tempt you to overspend may be a different story. But don't automatically close an old account simply because you rarely use it.

Talk to your lender before making significant changes when you're preparing for a mortgage.

4. Be careful about opening new credit before buying a home

That "save 20% today if you open our store card" offer can be tempting.

Think twice if you're preparing to buy a house.

New credit makes up about 10% of a typical FICO Score, and repeatedly applying for new accounts can work against you.

The same goes for financing a new car, furniture or other major purchases shortly before applying for a mortgage. Besides the credit inquiry, a new monthly payment can affect your debt-to-income ratio and potentially change how much you can borrow.

My rule for buyers: Before taking on a new debt while you're in the homebuying process, call your mortgage lender first.

5. Don't be afraid to shop for a mortgage

There's a persistent myth that talking to several mortgage lenders will destroy your credit.

Credit-scoring systems recognize that consumers shop for mortgage rates. FICO generally treats multiple mortgage inquiries made within a designated rate-shopping period as a single inquiry for scoring purposes. Depending on the FICO version being used, that window can vary, so it's smart to do your mortgage shopping within a relatively short period rather than spreading it over several months.

Credit card applications are different. Multiple credit card applications can result in separate inquiries.

6. Know that not every "credit score" is your mortgage credit score

Free credit-monitoring services can be useful. They're a convenient way to watch for changes, identify suspicious activity and get a general sense of your credit health.

But don't assume the score shown in an app is exactly what a mortgage lender will see.

There are multiple credit-scoring models and even different versions of FICO Scores. Mortgage lenders commonly use mortgage-specific FICO models, so the number your lender receives can be different from the score you've been monitoring.

That's why I tell buyers not to panic—or celebrate—over a single number from a consumer app.

7. Check your reports for mistakes

Before you apply for a mortgage, review your credit reports for accounts you don't recognize, incorrect late payments, outdated balances and other errors.

Pay particular attention to collection accounts.

Medical debt has special credit-reporting rules. Paid medical collections and medical collections under $500 generally don't appear on the three nationwide credit bureaus' consumer reports, while certain unpaid medical debt over $500 can still appear.

If you find a collection, don't automatically pay it off or make changes solely because you assume it will improve your mortgage score. Talk with your mortgage professional about how the account is being reported and what action makes sense for your particular situation.

8. Start building credit before you need it

Credit is something you build over time.

For someone with little or no credit history, a secured credit card can be one way to begin establishing credit. The key isn't spending a lot. Make a few manageable purchases, keep the balance low and pay on time.

Think of building credit a little like saving for retirement: starting earlier gives you more time to establish a track record.

FICO considers the age of your accounts, your payment history, how much of your available credit you're using, new credit and your mix of credit accounts.

What credit score do you need to buy a home?

There's no single magic number.

Different mortgage programs and individual lenders have different requirements. FHA guidelines, for example, allow a 3.5% minimum down payment with a qualifying score of at least 580; borrowers with scores between 500 and 579 may potentially qualify with at least 10% down, although individual lenders can impose stricter requirements.

VA is another good example of why you shouldn't rely on numbers you see online. The VA itself does not establish a minimum credit score for a VA-backed mortgage, although individual lenders may have their own requirements.

And qualifying for a mortgage isn't necessarily the same thing as getting the best mortgage.

A higher score can potentially mean a better interest rate or other more favorable loan terms.

For many conventional borrowers, getting into the mid-700s and above can put you in a much stronger position, although the exact benefit depends on the loan program, lender, down payment and other factors.

The best time to work on your credit? Before you find the house.

One of the biggest mistakes I see buyers make is waiting until they've found a house they love before talking with a lender.

That's backwards.

If you're thinking about buying in the next year—or even the next two years—talking with a knowledgeable mortgage professional now can give you time to identify issues and make strategic changes.

You may discover your credit is already in great shape. Or you may learn that paying down one card, correcting an error or simply giving your credit history more time could put you in a better position.

You don't need perfect credit to buy a home. But the earlier you know where you stand, the more options you may have when you're ready to make your move.

Thinking about buying a home in Hamilton County or the Indianapolis area? I'm happy to help you put together a plan, connect you with a trusted local lender and figure out the steps you can take now so you're ready when the right home comes along.