How To Prepare Your Credit To Buy a House

For many, a home is the biggest purchase they’ll ever make. Knowing your credit health can help ease the stress of such a major financial decision. If you’re worried about qualifying for a mortgage, creating a foundation of good credit and financial habits can help you achieve your goals.

Practicing healthy credit habits before buying a home may help you secure a mortgage with favorable loan terms. This can make your dream home more affordable. But just as important, you’ll go into the process with confidence in your credit and financial standing. Below are some tips on how to prepare your credit to buy a house:

Know what’s in your credit reports

Your credit reports are part of the financial story you’re telling to banks and lenders. Your reports are provided to lenders and the information within is what determines your credit score. You want to make sure the story is a true reflection of your history with credit. You can get free access to your credit reports weekly at annualcreditreport.com.

Read through your reports thoroughly and be sure you recognize the accounts and account activity as well as the accuracy of the personal information. If you find something you believe to be inaccurate on your TransUnion credit report, you can dispute it easily online through our dispute center. If you find inaccuracies on your other credit reports, you will need to submit a dispute with each credit bureau individually.

It’s helpful to remember that your credit report may not reflect the most recent activity on your account as lenders tend to update account information monthly. You may not need to submit a dispute — it may just need some time to update on your report. For instance, if you made a payment recently, it may not show up in your credit report immediately, but will likely be reflected when the lender provides their next update.

Build confidence in managing your credit

If you’re looking to improve your credit before buying a house, a mortgage broker may suggest you consider a credit repair company. Before you sign up with a credit repair company, know that there’s nothing a credit repair company can do for your credit that you can’t do yourself. You can save money and build confidence by managing your credit information yourself. 

It can feel like you’re filling out mounds of paperwork as you go through the home-buying process. For a purchase this big, lenders tend to go over everything with a fine-toothed comb. Making sure your credit reports are accurate and your personal information up to date can help prevent clerical delays. Not only that, but checking your reports early and knowing the information in them can give you confidence as you secure financing. Plus, it can help you determine what steps, if any, to take to improve your credit even more.  

Pay down debt you currently have

Lowering your balances can positively impact your credit score and signal to lenders your budget allows for a potential mortgage payment. Your credit utilization, which is how much of your available credit limit you’re using, is a major credit score factor. Paying down credit card balances, if possible, is a smart move before you prequalify or submit a formal mortgage application.

Know what you can afford

Your bank will approve you for a certain loan amount, but you don’t have to feel pressure to borrow up to that number. It’s important to have a budget ahead of time and stick to it. Buying a home can be an emotional experience, but keeping with your plan and knowing your numbers will help you make the best financial decision.

Some people like to harp on the perils of $5 lattes and other “unnecessary” daily spending habits. But getting the big things right, like home buying, can be far more impactful to your financial health long term. Spending over your budget for a home is one financial decision that could cost an additional tens of thousands of dollars, plus interest — that’s a lot of lattes. 

Avoid taking on additional debt if you can

You may be instructed by your home-buying team to not apply for new credit as you head toward closing on your house. It’s for good reason. Your mortgage application represents your finances in their current state — the combination of all your assets and debt. Applying for a new loan could signal a change in your financial status and could give your lenders pause about your ability to make payments on the original mortgage offer.

Not only that, but applying for new credit can temporarily lower your credit score.. Your credit score may act as a factor to determine your mortgage interest rate. Even a minor change in the interest rate can cost you thousands over the lifetime of the mortgage. So, it’s best to wait to apply for a new credit card or loan if you can as you prepare your credit to apply for a mortgage.

Your credit score is just one important part of the equation

Having a good credit score can help you get a mortgage with a low interest rate. The credit score needed to buy a home will vary among lenders and mortgage types. There are different credit scoring models, so the score you see in the app, website or service you use regularly may not be the one your lender uses to make a lending decision.

It’s important to consistently communicate with your lender throughout the mortgage application process. It’s also important to note that your credit score is only one aspect of your financial health your lender will look at. They may also request a bevy of financial information, which includes, but isn’t limited to, your income, checking and savings accounts, brokerage accounts, current loans and more.

Knowing your credit score is important. But remember that your score is based on information in your reports, so make sure you’re consistently reviewing your credit reports. This is true even after you’ve bought your home and you’re on to whatever comes next. It should become a regular part of your personal finance maintenance. We’ve created an interactive guide to help you understand your credit reports and learn how each section may impact your score.