How to Improve Your Credit Score to Buy a House

Your credit can greatly impact your ability to get a home loan. Higher credit scores can also mean better interest rates and loan terms, saving you a lot of money in the long run.

What’s encouraging is that your credit score isn’t set in stone. There are steps you can take to help improve your score, from changing the way you use credit to paying old debts and even fixing errors on your credit report.

The challenge for many people is knowing where and how to begin. First, let’s take a look at what is considered a good credit score for a mortgage.

Why a Higher Credit Score Can Help When Applying for a Mortgage

Your credit score is one of the most important factors when it comes to qualifying for a mortgage. A higher score may unlock better interest rates, which can make a big difference in your monthly payment — and how much you spend over the life of your loan.

For example, say you’re purchasing a $400,000 home with a 6.75% fixed interest rate, no down payment, and a 30-year loan term. Using Veterans United's VA mortgage calculator, your estimated monthly payment would be about $3,167. Now, if you were able to qualify for a 6.5% rate — something often possible with a stronger credit score — your monthly payment would drop to approximately $3,099. Over 30 years, that seemingly small change in rate could save you over $23,000.

Putting in a little work to boost your credit score before applying for a mortgage can pay off in a big way. By securing a lower rate, you’ll not only save money each month but also reduce the total amount you pay for your home over time.

6 Tips to Boost Your Credit Score Before Buying a Home

Building and maintaining a strong credit score is crucial when applying for any home loan, but it’s especially important when planning to use your VA loan benefits. A higher credit score can open the door to better loan terms and make the path to homeownership smoother.

Here are some key tips to help you build and boost your credit score:

1. Use Credit Responsibly

Each bill is your opportunity to tell a future lender what kind of borrower you are. Make the most of each of those opportunities. Pay your bills on time, and don’t take on more debt than you can handle.

Be careful with excessive credit inquiries. Shopping around for credit cards or other types of loans is important, but hard inquiries can ding your credit score and be an indicator of risk, especially if you don’t have a strong credit profile. It’s better to look up credit card eligibility information instead of applying for multiple cards at a time.

There’s also a difference between comparison shopping and trying to rack up a bunch of new credit, and credit scoring formulas (and lenders) can’t always tell the difference. FICO does allow for mortgage rate shopping within a 45-day window, meaning you can seek preapproval from multiple lenders without having each credit inquiry count against you.

Another tip for responsible credit use is to be careful about sharing your credit with others. Co-signing on a loan puts your financial future on the line. If your co-signer makes a late payment or goes into default, your credit score takes the same hit. Keep your credit in your control. Don’t share your credit with anyone.

2. Keep Credit Card Balances Low

You want to keep the balances on your credit cards relatively low, preferably 30 percent or less of your card’s limit. You also want to keep your cumulative spending below 30 percent of your entire credit limit. So that’s either no more than $300 on a $1,000 credit limit or $3,000 on a total credit limit of $10,000 spread across multiple cards.

Keeping big balances on your cards can drag down your score. For consumers who don’t use credit cards, getting one or two may actually help improve their credit score, provided they are used wisely.

It’s important to understand paying off your credit card on time every month is a step towards improving your credit score, but it’s not the sole solution. Paying off credit card debt only affects your credit score so much, and in reality, it may only affect your credit by a few points.

3. Avoid Co-Signing on Other Loans

While it might seem like a good idea to help a friend or family member by co-signing their loan, it can actually hurt your credit. Co-signing makes you legally responsible for the debt, meaning if the primary borrower misses a payment or defaults, your credit score could take a hit. Even if payments are made on time, the added debt impacts your debt-to-income ratio, which could make lenders wary when evaluating your own creditworthiness.

Focus on your own financial goals and avoid taking on unnecessary risk by co-signing loans. If you're committed to helping someone, consider other ways to support them that won’t impact your credit.

4. Don’t Close Old Accounts

The length of your credit history is important to your overall score. A more seasoned track record can help bolster your credit score. Even if you’re no longer using older credit card accounts, don’t close them out. Instead, keep them open and allow them to age.

In addition, freezing your credit card doesn’t hurt your credit score. If you keep the account in good standing, it will help improve your score. So if you no longer use a specific card, you can freeze it and still improve your credit score.

5. Settle and Pay Outstanding Debts

Judgments, tax liens and federal debts may have to be paid in full before you can close on a mortgage. In some cases, you may be able to move forward on a loan after establishing a repayment plan. But you’ll typically need to show lenders at least a 12-month history of satisfactory payments on that plan. Items in collections are more of a gray area, but it’s best to get these paid off as well.

6. Review Your Credit Report

Maintaining an accurate credit report is essential, especially when trying to secure a home loan. Unexpected errors and inaccuracies can infiltrate anyone’s credit history, potentially hurting your credit score. While there are several ways to review your credit report, a free copy is available through AnnualCreditReport.com.

What to Avoid When Trying to Build Credit

Here’s one thing we suggest you avoid: Paying a company or an individual for credit repair. The big reason why is that you can do everything they can. There’s no magic or secret to any of this.

Plenty of great free resources online offer tips and concrete ways to boost your score.

It also doesn’t cost anything to change how you use credit. All it takes is creating new and better habits.

Improve Your Credit with Free Coaching

If you’re trying to improve your credit with the hope of buying a mortgage, you should know about the Lighthouse Program® here at Veterans United. Lighthouse® consultants educate Veterans, military members and their families about their credit reports and give them the information and tools they need to take action on their credit.

This free service has helped more than 30,000 Veterans and service members overcome their credit challenges and go on to close on a home loan.

Talk with a Veterans United VA loan expert about how Lighthouse® can help you.