Buying a home is a big financial commitment. And your credit plays a big role in your ability to qualify for a loan and the interest rate you’ll receive. So, if you’re interested in learning how to build credit to buy a house, we’re here to help!
Why is a Credit Score Important?
Your credit score is a numerical representation of your credit history and how you’ve handled your current and past credit accounts. It’s calculated based on the information that can be found in your credit report, which is stored at each of the credit reporting agencies (or credit bureaus).
The best way for lenders to predict how likely you are to pay back your loan on time is to review your credit report. They use this information to make a decision about giving you a loan and what the terms of that loan will be.
Generally, if you’ve made all of your payments on time, lenders will predict that you’re likely to make your future loan payments on time. On the other hand, if you’ve had a habit of making late payments or missing payments in the past, your lender may be wary that you will not make your future loan payments on time and in full.
How Is Your Credit Score Calculated?
Understanding how your credit score is calculated is important when building your credit to buy a home. You’ll want to know which factors are weighed more heavily and are having the largest effect on your score. It’s important to note that your credit score calculation will be a little bit different depending on whether you’re looking at your FICO® Score or your VantageScore®. Here are the factors that affect your credit score:
- Payment History: This is the most important factor that affects your credit score! Payment history is your track record for repaying loans on time. It’s weighed the most heavily of all the factors that affect your score. Payment history makes up 35% of your FICO® Score and 40% of your VantageScore®, which makes it the most influential factor on your score.
- Credit Utilization: This is the amount of used credit compared to available credit, sometimes called credit usage or amounts owed. Generally, a lower credit utilization is better for your credit score, so you always want to keep your utilization as low as possible. While FICO® weighs amounts owed at 30% of your score, VantageScore® weighs it at 34%, broken down into 20% for the actual utilization, 11% for your balances and 3% for your available credit.
- Length of Credit History: The age of your oldest and newest credit accounts are averaged to determine your overall credit age. The older your credit age, the better your score will generally be. This makes up 15% of your FICO® Score, and is calculated as part of your depth of credit with VantageScore®, which makes up 21% of your score.
- Credit Mix: This is the number of different types of credit that you have, including car loans, student loans, credit cards, home loans and more. A diverse mix of credit types is usually good for your credit score. This accounts for 10% of your FICO® Score and is part of that depth of credit portion of your VantageScore®, which makes up 21%.
- New Credit Accounts: This is the number of hard inquiries and credit accounts you’ve opened recently. Opening a lot of accounts in a short amount of time can be an indicator to lenders that you’re spending more than you can afford. It makes up 10% of your FICO® Score and 5% of your VantageScore®.
How to Rebuild and Build My Credit
Your credit score can have a big impact on your ability to get a favorable home loan. Before you buy, you may need to build or rebuild your credit. So if you’re looking to build or rebuild your credit so that you can get a favorable home loan, there are things you’ll want to start doing now.
- Review Your Credit Reports: Before you apply for a home loan, it’s a good idea to know where you stand financially. Your lender is going to look at your credit reports, so it’s a good idea to review them first to find possible errors and know your current credit score. You can get your credit report for free each year from each of the major credit reporting agencies. Review your report and be sure to correct any errors with the credit reporting agencies right away.
- Pay Down Debt: As part of the home loan process, your lender will want to know your debt to income ratio. Debt to income ratio is the amount of debt you currently have, compared to your income. The best way to move this measurement in your favor is to pay down credit card debt, car loans, and any other debt, so you can qualify for the greatest amount possible on your home loan.
- Keep Up Good Credit Practices: If you’re trying to buy a house, you need to practice healthy credit habits, like making all of your payments on time and keeping a low utilization on your accounts. Now is not the time to miss payments on credit accounts or do anything else that might alarm your lender. In addition to paying down your debts and making all your payments on time, try not to open or close any credit card accounts before applying for a home loan.
- Limit Large Purchases: Your lender may be alarmed by any major credit card purchases or large loan amounts in your recent history. In addition to inflating your debt-to-income ratio, these may lead your lender to believe that you’re being irresponsible with your money or you’re not making enough money to cover your current expenses. If you’re serious about building your credit to buy a house, limit the large purchases you’re making. In addition to showing lenders that you’re responsible, it can also save you money that can go toward your down payment.
- Plan Ahead: It can take time to build credit. It’s not something that you’ll be able to do overnight or in a few weeks. You’ll want to start building your credit for a home as far in advance as you possibly can. Start implementing these steps now and allow your credit to work in your favor to help you find the home and the home loan that’s right for you.
What is Considered a Good Credit Score?
Credit scores can range from 250 to 900, but as we’ve discussed earlier, there are different models out there that calculate your credit score. This means that the definition of a “good” credit score can change, depending on which score you’re using.
If you’re looking at your FICO® Score, you can review their credit score ranges directly on their website. According to FICO®, a good credit score is between 670-739 and is near or slightly above the average U.S. consumers. A very good score is 740-799 and FICO® defines this as demonstrating that you are a very dependable borrower. Any score above 800 is considered exceptional.
If you’re reviewing your VantageScore®, which was created by Equifax, TransUnion and Experian, you can look to their websites to find more information. According to Experian, a good VantageScore® is between 700-749 and an excellent score is 750 and above.
What is a Good Credit Score to Buy a House?
To get a conventional home loan, you will need to have a credit score of at least 620. Some home loans such as the FHA loan, have lower credit score requirements. If you’re looking into a specific home loan, you’ll want to do your research to see if there is a minimum credit score required to get that loan.
However, it’s important to note that your credit score can affect the terms of your loan, in addition to your lender’s decision to actually give you a loan. Generally, a higher credit score can lead to more favorable terms on your loan, but that will ultimately depend on which lender you decide to go with. As a general rule, you want your credit to be at least in the “good” credit score range to get the best loan possible.
How Can Merrick Bank Improve My Credit Score
One of the fastest ways to build or rebuild your credit is to use your credit cards and make your payments in full, on time each month. Merrick Bank will report your account history and information to each of the 3 major credit reporting agencies every month. This ensures that the credit reporting agencies – Experian, Equifax and TransUnion – have your most updated information about your credit card usage. How you use your card and the payments you make will have an effect on your credit score over time.