Improving Credit Score for First-Time Home Buyers
Your credit score is one of the most important factors that will determine your mortgage eligibility and interest rate when pursuing homeownership. As a first-time home buyer, you want to ensure your credit is in top shape well before starting the home buying process. But how early should you start working on your credit?
The sooner, the better – a full year out from your target purchase date is ideal. But don’t worry if you’ve got less time. There are strategic credit repair actions you can take at different milestones along the way. Let’s go through improving your credit at the one year, six month, and three month markers before buying your first home.
One Year Before Purchasing a Home
Giving yourself a full year allows ample time to identify and rectify any major credit issues before lenders scrutinize your reports. Here are some key steps to improve credit scores for first-time home buyers at the 12 month mark:
Check Your Credit Reports and Dispute Errors
Imagine you’re reviewing your credit reports and notice a collections account for $572 from a medical provider you’ve never visited. Yikes! Turns out it’s an error, but one that could be tanking your credit score needlessly.
You’ll want to obtain your reports from the three major bureaus (Experian, Equifax, TransUnion) and dispute any inaccurate negative items in writing. Simply having the collections removed could instantly boost your score by 50-100 points.
Pay Down Revolving Debt
Let’s say you’ve been carrying a $5,000 balance on your Visa card for the past year at 18% interest. Those recurring finance charges make the balance nearly impossible to pay down.
Your credit utilization ratio, which compares your statement balances to total credit limits, makes up 30% of your FICO score. By knuckling down and paying off that full $5,000, you could reduce utilization from 85% to 15% – the ideal range to maximize your score.
Become an Authorized User on Someone’s Account
What if your credit file is fairly thin because you’ve never had much credit extended to you in the first place? You could ask to be added as an authorized user on a family member’s older, well-aged credit card account.
For example, your parents have had a zero-balance credit card with perfect payment history for the past 15 years. Having that added to your credit file provides an instant credit history boost.
Apply for a Credit-Builder Loan
If you have little to no credit history, you could apply for a credit-builder loan product from your bank or credit union. Let’s say you open one with a $1,000 limit, make affordable payments, and it reports on-time payments to the bureaus each month.
Within 6-12 months, you’ll have built a track record of responsible credit management. This helps you get scored rather than being denied for insufficient credit history.
By putting in the work a full year out, you’re setting yourself up for credit score success. But what if you’ve only got six months left before house hunting? Let’s look at some key actions for that timeframe.
Six Months Before Purchasing a Home
At the six month mark, you’ll want to take a look at specific aspects of your credit report to polish credit scores for first time home buyers:
Negotiate to Remove Derogatory Marks
Imagine two years ago, you experienced a job layoff that caused you to miss five payments on your car loan before finding a new job and getting back on track. While those lates are now dated, they’re still severely depressing your scores.
You could call the lender, explain the circumstances around that period of hardship, and ask if they’ll remove those lates from your credit report in exchange for paying remaining interest. Many lenders are willing to make such “goodwill adjustments” in cases of financial distress.
Check Your Credit Utilization Ratios
What if you’ve paid off that $5,000 balance from the year before, but still have $20,000 in total credit limits across your cards? Your overall utilization ratio of 25% is good, but it may be worth requesting…
Request Credit Limit Increases
Further optimize your credit utilization. For instance, let’s say you’ve had that Visa card with a $5,000 limit for five years now. Requesting a credit limit increase to $10,000 cuts your utilization in half, which could boost your scores.
Simply call your issuers and make the request based on your income and good standing as a customer. Easy way to drive down your utilization ratios further without applying for more credit.
Avoid Applying for New Credit
Speaking of applying for new credit, you’ll want to be very judicious about it at this stage. Each application results in a hard credit inquiry, which can temporarily ding your scores by several points each time.
So let’s say you’re pre-approved for a new credit card with a $200 signup bonus. As tempting as those reward dollars sound, it’s wise to avoid new applications and account openings within six months of your