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Get Your Credit Ready to Buy a Home

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If you’re looking to purchase a home, your credit profile will be one of the most important factors used to determine whether you’ll be approved for a mortgage. The information included on your credit report can determine what type of lending terms you qualify for — and make or break your eligibility as a potential borrower — so it pays to get your credit in shape as much as possible before you apply.

Understanding credit reports and scores

Your credit history tells lenders how reliable you are as a prospective borrower. That information can be found on your credit reports from the three major credit reporting bureaus: Experian, Equifax and TransUnion. Your reports include a list of your debts and payment history for those debts, any accounts that have been referred to a collection agency, public record information and recent credit inquiries.

The details included in your credit reports determine your credit score. Scores typically range from 300 to 850. Any negative information (such as missed payments) will bring your score down, while positive info like low credit utilization will bring your score up.

There are five factors on your credit report that determine your credit score:

  • Payment history
  • Amounts owed
  • Length of credit history
  • Credit mix
  • New credit

Check out LendingTree’s credit score explainer for a deep dive on each factor.

You should also keep in mind that the credit score your mortgage lenders use to evaluate your loan application may be different than the one you see on your credit card statement, or any other kind of free credit score you have access to — that’s because there are dozens of different credit scoring models. Lenders also pull three credit scores based on data in each of the three major credit bureaus, and use the middle score in their mortgage decision.

What mortgage lenders expect from your credit profile

When you apply for a mortgage to purchase a home, lenders review your financial information, including your credit reports and scores, to determine whether you’re eligible to borrow from them. Every lender is different, but below we highlight some common credit-related requirements for both conventional and FHA mortgages.

Conventional loans

Conventional mortgage lenders may expect at least a 620 credit score, or possibly higher. Remember: The higher your credit score, the better your mortgage interest rate. Additionally, if you’re putting down less than a 20% down payment, a higher credit score likely means a lower monthly private mortgage insurance payment.

Increase your chances of mortgage approval by having a credit score well above the minimum that lenders require. The average credit score was 751 for conventional loans that closed in November 2018, according to mortgage software firm Ellie Mae’s latest Origination Insight Report.

FHA loans

Loans guaranteed by the Federal Housing Administration (FHA loans) have a lower credit score threshold for potential borrowers to meet. If you’re putting down the minimum 3.5% down payment, you’ll need at least a 580 credit score. The lowest credit score that an FHA lender may possibly accept is 500 — if your score falls between 500 and 579, you’ll need at least a 10% down payment.

But don’t assume that if your credit score is in the 500s you’ll be approved for an FHA loan — the average score among FHA loans that closed last November was 676, according to Ellie Mae.

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Mortgage options for people with bad credit

If you’re concerned that you can’t meet the above credit criteria but want to buy a home now, you could turn to lenders that offer alternatives to traditional mortgage products.

These products fall under a category referred to as “non-prime” or “non-QM (qualified mortgage)” loans, and they are geared toward prospective borrowers who don’t have standard income documentation and who have bad credit and a higher debt-to-income ratios than what’s often accepted by conventional and government-backed mortgage lenders. Plus, this type of mortgage lending usually doesn’t involve a traditional financial institution.

But such products are expensive and can carry risky terms, so consider them a short-term solution, and plan to refinance into a traditional product once you can qualify.

A safer strategy is to work on improving your credit before you plan to buy a home, so you can improve your chances of qualifying for a loan with attractive terms.

4 ways to improve your credit

Consider these four ways to improve your credit score before you start the homebuying process.

Dispute any and all errors

If after reviewing your credit reports you find some inaccurate information on one, two or all three of your reports, contact the credit reporting bureaus directly to dispute those errors. Having those blemishes removed from your reports may help boost your score. Read LendingTree’s explainer on how to dispute credit report errors for more guidance.

Establish a history of on-time payments

Your payment history makes up the biggest chunk of your credit score at 35%. If you have a history of late or missing payments, lenders consider that risky behavior and will take issue with it.

To help get you on your way to a better on-time payment history, set reminders for yourself or take advantage of automatic payments.

Pay down your debt

If you’re close to the limit on each of your credit cards, or have a high percentage of your income dedicated to paying off your debt every month, it’s time to more aggressively pay down those balances.

The amount of debt you owe makes up 30% of your credit score, so it’s good practice to keep your credit use low compared to the amount of available credit you have. For example, a good rule of thumb is to keep the balance on your credit card at or below 30% of the credit limit amount. So if you have a card with a $1,000 limit, you should have a balance of no more than $300.

Avoid unnecessary credit inquiries

Your score drops a few points when you apply for new credit and a lender pulls your credit report as part of the application. That information stays on your report for about two years, and too many inquiries can further impact your score. Lenders also consider a borrower with several inquiries more risky than one with no inquiries. Bottom line: Don’t apply for credit cards and loans you don’t need, and if you can, avoid applying for any new credit in the few months before applying for a mortgage.

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