How to Clean Up Your Credit Before Buying a Home
Even if you don't have great credit, you can still work towards buying a home, whether you want to buy your
first home or move into a new home from your current one. There are several simple steps you can take to clean up
your credit, which can increase your chances of getting a mortgage, lower your mortgage interest rates, and save
you significant funds.
Here are the steps you need to take to bump up your credit before taking that journey towards a new
First, know how important it is
Some simple calculations can tell you how important it is to work on your credit score. Here are some
examples to show you what a difference a few points in your credit score can make. (Note: The rates
and numbers given here are just examples, drawn off of national average for lending rates.):
Let's say you're looking at a house that costs $200,000 after your down payment. We won't worry about
complicating factors like insurance and closing costs - just the basic cost of the house.
If your credit score is in the 620-659 tier, you might qualify for a traditional loan at a rate of 7.096%.
With this type of mortgage rate on a thirty year loan, your monthly payment to the mortgage alone
will be about $1,340. Over the life of your loan, you'll pay a total of $283,668 in interest - more than
doubling your original loan.
Now, let's say you up your credit score into the next tier 660-699. Here, you can expect a mortgage
rate of, say, 6.286%. Here, your monthly payment will be $1,230, and you'll pay a total of $245,000 in
interest - or a savings of almost $39,000!
Take it one step further and put your credit in the top tier 760-850. In this tier, you could get prime
interest rates of 5.780%. In this case, your monthly payment would be about $1,170, and you would
pay total interest of about $221,545 over the life of your loan. From the lowest credit tier we looked at, that's a
savings of over $62,000 in thirty years!
As you can see, bumping up your credit before you buy a home can save you significant cash, so it's
definitely worth your while to take the time to do this before you buy a home.
Second, see where the issues lie
Before you start improving your credit, you need to know what's counting against you with your credit.
That means you need to pull your credit report, and the report of your spouse or partner if you're
planning to buy a home based on the financials of both yourself and your partner.
You can get a credit report for free from annualcreditreport.com, as long as you haven't pulled one
from that particular company in the past year. It's a good idea to pull a report from each of the three
reporting companies, Experian, Equifax, and Transunion, since they can sometimes include different
information (and different mistakes). You'll also need to pay each company to give you your actual
On your credit reports, you should first check for mistakes. Then, look to see what is counting against
you, whether that be late payments, a lien out in your name, lack of credit history, or whatever. Make a list of
the various issues that are affecting your credit.
Third, start fixing the issues
Finally, you'll need to start fixing the problems with your credit, of course. If you have terrible credit, just
a few simple steps can often improve it dramatically. If you're fighting for the last few points to put your credit
into the top tier of 760+, you might need a little more time. Also, if you already have very good credit with few
marks against you, be very careful not to make mistakes like turning in a payment late, as these mistakes actually
tend to affect top-tier credit scores more than lower scores!
Here are some of the common issues with credit and how you can go about fixing them:
Payment History: A huge part of your credit score (about 30%) is based on your history of
making payments on time. This doesn't just mean making your car and credit card payments
one time, either, as even late utilities payments can affect your credit.
If your report shows late payments, start automating your payments and making them on time,
Debt Usage: If you have revolving debt, such as credit card debt, the goal here is to keep
balances low, as compared with your limits. If you're close to the limit on a credit card you're
having trouble paying off, consider transferring your balance to low interest credit cards.
A lower interest rate and lower minimum monthly payment makes it easier to pay those
balances down, which is one of the fastest ways to increase your credit score.
Credit Age: The longer you've had credit, especially good credit, the better your credit is
to be. Having accounts on your report that have been open for more than seven years does
wonders for your credit score.
While you can't do anything to age your credit except for wait, you can keep from damaging
your credit in one way. Even if you're paying down debts, leave your oldest account open at
all times. Otherwise, you risk making your credit appear younger, which can harm you in this
Account Mix: Having a blend of different types of credit in your portfolio is a good idea,
increases your credit score by showing you can be responsible with both a car loan and a credit
card, for instance. Some people try to avoid using credit cards altogether, but not having a
credit card can actually harm your credit in this category.
If you don't have any credit cards, you can quickly improve your score by applying for one low-
limit credit card that you use for, say, gas purchases at the pump, and that you pay down every
month or only carry a very low balance on.
Inquiries: The more you apply for credit, the riskier you look to a lender. When your
report is pulled by a potential lender, employer, landlord, or insurance agent, that inquiry
stays on your credit report. Too many inquiries in a short period of time can count against you.
However, pulling your own credit report doesn’t count.
If you're getting ready to compare loan offers for a big purchase like a car or home, don’t apply
for credit unnecessarily. Also, put in all your applications within a week, and those inquiries will
count against your credit score as a single inquiry, since the credit reporting companies know
you need to apply with various lenders in order to find the right loan for your needs.
According to the US Department of Housing and Urban Development, it's possible to buy a home when you don't have
great credit, especially with the help of programs like the Federal Housing Administration's loan program for
first-time home buyers who don't have great credit or a large down payment. However, as you have seen, improving
your credit by even ten or twenty points can make a huge difference in the total amount you pay for a home. So even
if your credit is in the tank and you're going to buy a home through a special low-credit program, working on your
credit score before you buy is a good step to take.
If you already have average or good credit, it may take a few months to improve your credit score. However,
those few months of continuing to rent or live in your old home could save you tens of thousands of dollars in the
Daniela Baker, personal finance blogger at CreditDonkey says, these simple steps aren't always easy to do, but
by working hard on your credit, you can get a better deal on your next home and save money over the long term.