First Step for the First Time Home Buyer - Improve Your Credit Score

Improve Your Credit Score to Score a Mortgage for Your First Home

If you're going to get a mortgage, you'll likely need to improve your credit score. This is a simplified calculation of your history of paying back debts and making regular payments on loans. If you're borrowing money to buy a home, lenders want to know you'll pay them back in a timely manner, and a credit score is an easy estimate of those odds.

Pull your credit report - There are three major U.S. credit bureaus (Experian, Equifax, and TransUnion), and each releases its own credit scores and reports (a more detailed history that's used to determine your score). Their scores should be roughly equivalent, although they do pull from different sources. 

Assess where you stand - It's simple: The better your credit history, the higher your score—and the better your opportunities for a home loan. The Federal Housing Administration requires a minimum credit score of 580 to permit a 3.5% down payment, and major lenders often require at least 620, if not more. So what can you do if your credit report needs help? Don't panic, there are ways to clean it up.

How to improve your credit score with error disputes - Credit reports can contain errors that can erroneously hurt your score. So if you spot any, start by sending a dispute letter to the bureau, providing as much documentation as possible, per FTC guidelines. You'll also need to contact the organization that provided the bad information, such as a bank or medical provider, and ask it to update the info with the bureau. This may take a while, and you may need documentation to make your case. But once the bad info is removed, you should see a bump in your score.

Erase one-time mistakes - If you made a mistake and missed just a payment or two, most companies will indeed tell their reporting division to remove this from your credit report. This will not work if you have a history of late payments, but for accidents and small errors, it's an easy way to improve your credit score.

Increase your limits - An easy way to increase your credit score is to simply pay off your debt. Not an option right now?  Ask your credit card companies to increase your credit limit instead. This improves your debt-to-credit ratio, which compares how much you owe to how much you can borrow.

Pay on time - If you're often late with payments, now's the time to change. You have the power to improve your credit score yourself. Commit to always paying your bills on time; consider signing up for automatic payments so it's guaranteed to get done.

Give yourself time - Unfortunately, negative items (such as those habitually late or nonexistent payments) can stay on your report for up to seven years. The good news? Changing your habits makes a big difference in the “payment history" segment of your report, which accounts for 35% of your score. That's why it's essential to start early so that you're sitting pretty once you're shopping for homes and find one that makes you swoon.

Once you've set your credit on a better path, it's time to tackle the next major hurdle: saving for a down payment.