How to Build Credit to Buy a House Fast

When it comes to buying a house, your lender will be looking through your financial information with a fine-tooth comb. Before you submit your mortgage application, it is crucial to know how to build credit.

Credit scores play a significant role in determining what your mortgage rate may be, the amount you can afford, and more. While you do not need to have perfect credit to be approved for a home loan, it is a good idea to take steps to improve it prior to jumping into the homebuying process.

Why is your credit score important when buying a house?

First, it is good to understand exactly why your credit score is such an important factor when it comes to buying a home.

When looking at your credit score, lenders are able to assess your reliability for repaying loans and bills. Oftentimes, your score is a good indication of whether or not you have a history of managing your finances responsibly and are ready to handle paying back a mortgage. Meeting a lender’s minimum credit score requirement can be a good way to get your foot in the door, but a higher score will unlock better interest rates. This can save you more money over the life of the loan and potentially lower your monthly payments.

What credit score is needed to buy a house?

Every lender will have their own borrower qualifications, but most require you to have a credit score of 620 or higher in order to qualify for a mortgage.

How to build credit before applying for a mortgage

Your credit score is important, but how can you increase it prior to applying for your mortgage? Let us dive into the steps you can take to build up your credit, so you are ready to tackle the homebuying process with confidence.

1. Review your credit report

The fastest way to raise your credit score is by checking your credit report for errors. Sometimes, credit bureaus make mistakes, and when these oversights happen, it can negatively impact your score without you even knowing. The good news is that you can dispute credit report errors for free. You will need to get a copy of your credit report from each of the major credit bureaus (Equifax, Experian, and TransUnion) and review them for possible errors. If you find one, make sure you have documentation that can act as evidence in support of your dispute.

Here are some of common errors to keep an eye out for:

• Incorrect payment history

• Paid off accounts that are still reporting a balance

• Debts older than seven years

• Identity theft

If you determine a discrepancy in any of your credit reports, be sure to contact the bureau directly by phone to start the dispute process. You may also be able to submit it online or by certified mail.

2. Reduce current debt and credit balances

Credit utilization is a big factor when it comes to determining your overall score. It is ultimately based on the total available credit you have at your disposal versus the amount you owe on current accounts. A good way to increase your credit score is by lowering your credit utilization ratio, especially if it is over 30%. Start by paying off the balances on any credit card accounts that are in your name, and settling balances owed on other debts, like personal loans.

3. Avoid opening new credit accounts

Every time you open a new credit account it impacts your score. This is because they require a hard inquiry that typically lowers your score by about five points. Each hard inquiry also remains on your credit report for up to two years. So, if you are looking for ways to increase your score quickly, applying for that new credit card will have the opposite effect.

4. Abstain from closing old or current accounts

On the other hand, it is best to leave any current or old credit accounts open while you are applying for your mortgage. Though there are no hard inquiries involved in closing an account, it is possible that it will raise your credit utilization ratio. Remember, you want to keep that ratio at 30% or less, so it is best to avoid using your lines of credit rather than closing the accounts entirely. 

5. Keep up with making on-time payments

The tried and true method for improving your credit score is by ensuring you are paying all of your debts and bills on time, but if you are looking for how to build credit fast, paying down high balances is a great first step. Late or missed payments will have a significant impact on your overall score and remain on your credit report for as long as seven years. A consistent history of timely payments establishes your standing as a responsible borrower to lenders.

6. Become an authorized credit card user

First-time homebuyers may not have the benefit of a long, established credit history. In this case, you may want to consider asking for help from a responsible credit user. When you become an authorized user on a relative’s credit card account, you automatically gain the advantage of their credit history. This is because the credit history of that account is added to your credit report, while the primary cardholder continues to be responsible for making the payments.

However, it is important to note that any missed or late payments from any credit user will be added to both of your reports. Be sure that you are asking for assistance from someone you trust, and do not take advantage of their generosity.

How long does it take to improve credit score?

Though your credit score will not change overnight, there are steps you can take to hasten an increase before you start applying for a mortgage. That said, the best place to start is by establishing responsible credit building habits. Make your payments on time and keep your credit utilization low.

You do not need perfect credit to buy a home, but you can set yourself up for success by taking the time to improve your score.