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How to Improve Your Credit Score and Buy a House

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A new home. It’s the American dream. Whether it’s a cute cottage with the white picket fence in the burbs, or a hip loft downtown, buying a home is a goal for most people. But how does a person know if their credit is good enough to qualify? Or what if their score is less than stellar? Here’s how to find out, get on track, and nudge that number upwards.

First Things First

Before you do anything, call a loan officer at Wyndham. Buying a home can be complicated and overwhelming, but you aren’t alone. Wyndham’s loan officers are well versed in all the financial aspects that come with this big purchase and want to help you. No need to be scared of checking your credit, budgeting, paying down debt, and saving for a down payment—you’ve got someone on your side with you.

Want help improving your credit score to buy a house? Get a free rate quote HERE and we'll get started

How Do I Check My Credit?

Before considering a home purchase, everyone should check to see if they have a good credit score. By law, a person is entitled to one free copy of their report from the three major credit reporting companies (Experian, TransUnion, and Equifax) every 12 months. The only place to get a free report is from annualcreditreport.com.

Note that this will just be a report, not score. There are many companies out there that sell credit scores, and most large banks even provide this as a free service. However, these may just be estimates as their scores may only reflect results from one source’s reports or they use a different scoring model.

Related: 5 Credit Card Mistakes That Could Prevent You From Getting a Mortgage

What is a Credit Score?

Your credit score is a statistical number that essentially shows others how likely you are (or are not) to repay your debts. So having a good credit score makes a lender more willing to lend you money.

Check out our Glossary to read up on mortgage terms you need to know before you buy a home

FICO (named for Fair Isaac Corporation, the first financial company to create credit scores) is by far the most popular scoring model. Their scores range from 300 to 850 and are made up of the following factors:

  • Payment history: The ability to pay bills on time. (35% of your score)
  • Amounts owed: Also called utilization. How much is borrowed divided by credit limit. The lower, the better. (30%)
  • Length of credit history: The average age of active credit lines; longer is better. (15%)
  • New credit: Requesting new lines of credit will temporarily hurt a score. (10%)
  • Credit mix: The different kinds of credit held, like credit cards, student debt, or car loans. (10%)

FICO scores can differ between the different bureaus because not all creditors report information to all of them.

Those first two items are most important; they make up two-thirds of a total score. So, paying all your bills on time and not carrying large balances can result in a good score. But remember, the minimum credit score to secure a mortgage varies depending on the type of loan:

  • Conventional Loan: 620+
  • FHA Loan: 580+
  • VA Loan: 620+ (some lenders require 580)
  • USDA Loan: 640+
  • FHA 203K Loan: 620+
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Before trying to buy a house, check your credit report online for errors or negative accounts.

What Next?

Before applying for a mortgage, it pays to get rid of excessive debt—even though it could take a while. Getting rid of debt is a great way to work your way to a good credit score.

There are two popular ways to tackle the money you owe. The first one is to figure out what debt has the highest interest rate and aggressively pay that one down. Interest is a serious speed bump on the road to financial freedom.

The second method of debt reduction is called snowballing. It’s simple and effective.

  • List all debts from smallest to largest balance
  • Attack the smallest balance aggressively while maintaining the minimum payments on all the rest.
  • Once that one is paid off, roll that money over into the next-largest one.
  • Repeat.

This way, there’s a true sense of accomplishment in seeing balances drop away quickly. It can also be easier and more effective for clearing debt; some people get intimidated and feel hopeless when looking at a large balance.

Is There Help?

Consumers aren’t alone in this debt-reduction quest. Technology can help. There are two big names in terms of finance-management apps, Mint and You Need A Budget (YNAB). They both help people see where their money goes and get a handle on spending; they just go about it in different ways.

Read: How to Put Together a Monthly Budget Before Buying a Home

Mint is free and the most popular budget app out there. It tracks all expenses automatically and can set budgets for several categories. Say you have a $150 monthly budget for dining. When nearing that limit, Mint sends out a notification so you don’t exceed it.

YNAB costs $6.99 a month, after a 34-day free trial. This one takes a more hands-on approach. At the end of every day, users must categorize each and every dollar spent. It helps you keep your budget front-of-mind and stay disciplined.

Both companies work on desktop, Android, and iOS to keeps tabs of finances while on the go. It’s purely personal preference as to which you want, but the key is to use one of them and use it often. Remember the end goal here, a new home.

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Once you’ve got your credit under control, get ready to pick out paint colors for your new home!

What About the Down Payment?

Saving for a down payment is crucial. But as a general rule, it’s better to pay down debt than to save for a bigger down payment—at least at this point.

To a bank, it's all about the debt-to-income ratio, or how much someone is paying on their debt each month compared to their monthly income. That ratio, expressed as a percentage, is calculated by dividing total monthly debt payments by gross monthly income. Debt-to-income ratios can be as high as 50 percent for conventional loans and 55 percent for FHA loans—so even if you’re concerned about your debt level, you likely don’t need to be.

What to do with all this new-found knowledge? Make a plan. Get that credit report and fix any errors you find. If you can (and if you need to), pay down some of your balances. Most people have a good enough credit score to easily qualify for a home—so get the realtor on the phone, because you’re ready to start picking out paint colors.

 

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