With mortgage interest rates rising quickly in recent years, improving your credit score is one way to get the lowest rates available to you. Knowing the minimum credit score needed to qualify for a home loan, as well as how to increase your score can help put you in the best position for your purchase and your financial wellness.
Minimum Score Needed
Once you’ve decided to buy a home you should check your credit report to get your credit score and know where your credit stands. Federal law requires that the three major U.S. credit reporting agencies provide free credit reports to individuals each year. You can get your free credit report at annualcreditreport.com.
Home loan lenders will examine your credit report, credit score and income, among other things, when you apply for a mortgage. Most will require a credit score of 620 or higher, depending on the type of mortgage. The higher your credit score, the better (lower) interest rate you’ll receive.
How to Improve Your Credit Score
Reviewing your credit report gives you a financial snapshot of where you stand so you can plan on how to improve your credit score before you apply for a mortgage. Positive activity could include paying down debt, improving your payment history, building credit, avoiding new lines of credit once you have a few established, and more. Let’s take a closer look at these.
- Pay Off Outstanding Debt. Paying down what you owe lowers your debt-to-income ratio, which is a big factor in getting approved for a home loan. For example, lowering your credit card debt to under 30 percent of your credit limit tends to increase your credit score. Also, ensuring monthly payments are made on time builds a good payment history. If you’re behind on any payments, be sure to make those current before you apply for a home loan.
- Build Credit. If you are starting out and need to build more credit, you can do so with a secured credit card or a secured loan. These options are available at some financial institutions, including Travis Credit Union. Secured credit cards and loans work by using your own money as collateral in case the loan should default.
For example, a secured credit card with a credit limit of $1,000 will require that you keep $1,000 in a savings account as collateral, just in case. You’re able to use the credit card normally as long as monthly payments are made. For the secured loan option, your collateral funds will also be kept in a savings account and the financial institution will lend you that same amount. You’ll pay that loan back in fixed monthly payments. Once the loan is paid off or the secured card is closed, your collateral funds will then become available to withdraw.
- Avoid New Lines of Credit. When you apply for a new loan, a lender will pull your credit report. This credit review creates a hard inquiry on your credit report, which lowers your credit score. Too many hard pulls of your credit will negatively impact your credit score, so avoid any new loans unless absolutely necessary. Before applying for new credit, check with lenders such as Travis Credit Union to see if you’re already pre-qualified for a loan. This lets you see your loan options before your credit is pulled.
Travis Credit Union offers concrete ways to help you improve your credit score. You can boost your credit score immediately with Experian Boost. TCU also has free financial counseling through GreenPath for members who need help getting their finances under control. You can also take our free Financial Health Assessment to get started on improving your personal finances. Understanding where your credit score stands is an important step on the path to Financial Wellness.
To learn more about how we can help you with your home loan, credit score or other product or service, visit traviscu.org.