It takes great effort to secure the required credit score to buy a house. Sadly, this purchase can also knock down your rating. For many buyers, the drop goes as low as 40 points. The more expensive the house, the lower the score. New homeowners with multiple credit lines also have massive points drop to contend with.
Depending on your spending habits, buying a house can set your credit score to the lowest point in one year. The good news is that you can improve your credit in months, with patience and prudent spending. As long as you have a financial plan in place, getting mortgages can have a minimal impact on your credit score in the long term.
Here is a guide on how to improve the mortgage credit score:
1. Request a copy of your credit report
The most important step to take is to check your credit score and points. Find out where your credit stands by requesting a free report from any of the two bureaus: TransUnion and Equifax.
Your credit report contains records of your repayment history, repossession details, and current debt. Look out for inaccuracies in your report. Factors like incorrect entries, late payments, and identity theft can affect your credit standing.
The law mandates the credit bureau to investigate criminal activity on your credit line. Requesting a copy of your credit report makes it easy to identify and dispute inaccuracies.
2. Pay off existing loans
Paying off existing loans is an essential step on how to improve mortgage credit score. Your payment history makes the bulk of your credit score. When saving up to buy your house, consider clearing your existing debt as well. Although essential, buying a house adds more debt to your credit history.
After buying your house, pay off existing loans from the biggest to the smallest. Make larger payments to the higher loans and spread the smaller ones.
3. Reduce debt-to-income ratio
Having a high cash flow allows you to pay off debt easily. However, don’t spend more than you earn on credit. Look for ways to increase your income by either taking freelance jobs or signing up to drive for rideshare apps after work.
However, increasing your income won’t help your credit score if you don’t keep maintain a low debt-to-income ratio. Ensure you don’t owe more than you earn. Keep your spending limited to essentials. No need to splurge or make impulsive purchases at this point.
4. Don’t apply for new credit cards
Applying for an additional credit card puts you at risk of a lower credit score. Based on statistics, lenders get the message that you’re a risky consumer since most people with multiple credit cards cannot make timely payments.
Opening a new line of credit after buying a house can be a red flag. Maintaining your current credit shows financial stability, which can boost your score.
5. Save up for a chunky down payment
If you must incur new debt after paying your mortgage, make a sizeable down payment. The more cash you have to put down for a purchase, the lower your interest rate. This also lowers your lending cost and payment time.
If you can, consider saving up to 30% down payment to lower your payment costs. This shows a healthy payment habit that will shoot up your credit score.
6. Maintain 35% spend from credit limit
Limit the maximum spend on your credit card to 35% of your available credit. Even if you have a $5000 credit card, calculate the cap on your spending based on the sum of your credit line.
For instance, to make a purchase on a $5000 card with a line of credit of $8000, limit your spend to $4550 i.e. (8000+ 5000) x 35% = $4550. This sends the message of financial responsibility and restraint, which are important for bringing up your score.
7. Timely payments
Late payments can permanently ruin your credit score, especially right after paying for your house. If you recently received a late payment notice, wait for at least six months before taking out a new loan. All things being equal, the six-month wait resets your record and lessens the damage to your credit score. Creating a pattern of timely payments will boost your score.
If you struggle with remembering the time limit, set reminders on your calendar before each monthly payment.
8. Use all lines of credit
Most times, buyers favor one particular credit card. From rewards programs to down payments, there are many reasons to neglect your credit facilities. To improve your credit score, use all lines of credit no matter the purchase.
Closing unused accounts won’t help your credit score, since your entire credit line accounts for almost 15% of your points. The longer your credit accounts remain open, the better your score. Maintaining a lean spending profile shouldn’t affect your credit facilities. Instead, use the cards to make small purchases at the gas station or grocery store.
If you’re worried about overspending, limit your spending on these cards to between $10 – $30. After each purchase, transfer the fee to your card to clear out the debt immediately.