The journey towards homeownership starts with a good look at your credit score. You'll likely need a mortgage if you can’t afford to pay for a house, like 87% of homebuyers in 2021. Lenders will look at your credit history to ensure that you can handle the repayment responsibly, so you need a good credit score for buying a house.
Everyone makes mistakes, including your credit reporting agencies. The most important thing to check on your credit report is that your information is correct and up to date. Possible errors include incorrectly reported payments, outdated information, and accounts that don’t belong to you. You should also monitor your credit file for fraudulent activity. Fraudsters can take credit in your name if they access your personal details. Contact the credit referencing agency to correct any details that look wrong. Fixing a mistake can boost your score immediately.
Lenders look for consistency in financial behavior while reviewing an application. It takes time to build your credit score after delinquencies and late payments. Each timely payment is a step towards improving your credit history. A simple step, such as setting up automatic payment on your bills and debts, will help ensure you don’t miss out on a payment. You can also set calendar reminders to log in and make payments. Talk to your creditor if you think you cannot make a payment. They may arrange a repayment plan that suits you.
When trying to improve your score, it is always a good idea to avoid applying for loans. If you have an old debt on your credit report, take some time to pay it down before applying for a mortgage. Doing so will lower your credit utilization. New debt can raise a red flag for lenders; they can see it as a sign of financial instability. However, if you have several outstanding debts, it may be advantageous to take a consolidation loan from the bank to pay them off.
The longer your credit history is, the better it looks to lenders. Closing accounts can lower the amount of credit you have available. It will also increase the percentage of credit in use. Lenders will prefer a lower credit utilization ratio as it shows financial stability. It’s best to keep the amount you have used at 30% of your total credit line. Asking for a credit limit increase can also improve your credit utilization ratio.
If a relative has a credit card account with a good history of on-time payments, you can ask to be included as an authorized user and take advantage of their positive payment history. The account holder doesn’t even have to let you use their card for your credit to improve.
While it can be possible to qualify for a mortgage loan with bad credit, improving your credit score is in your best interest. Building good credit is a gradual process and can take years to establish; take and pay off loans carefully so you can have a good credit score by the time you need a significant loan like a mortgage.