Most first-time homebuyers cannot buy a property outright with cash. Instead, they rely on mortgages to finance home purchases.
The higher your credit score when you apply for a mortgage, the more competitive the interest rate you will get on that loan. Once you’ve seriously considered buying a home, it pays to get your score in the best possible shape.
If you’re getting close to this point and aren’t sure how your credit score stacks up, Fannie Mae might have an idea. A recent Fannie Mae report found that the average credit score for first-time homebuyers was 746. That’s nearly in line with the average credit score for all homebuyers, not just first-time buyers – 754.
If your credit score is around 746, that means you may be in the right place to qualify for a mortgage. Chances are, you’ll also get a fairly competitive mortgage rate with a score like this.
However, if your score is fairly low, you may need to take steps to improve your score before applying for a home loan. Otherwise, you could be stuck with higher mortgage rates — and more expensive home loan payment management.
How to Improve Your Credit Score
A high credit score sends a message to mortgage lenders that you are not at much risk as a borrower. That’s because a high score indicates that you generally pay your bills on time, don’t use too much of your available credit, and have a healthy credit card and loan portfolio.
If you think you can improve your credit score before applying for a mortgage, there are steps you can take to improve your credit score, some of which may take longer to produce results.
1. Pay all bills on time
Your payment history is more important than any other factor in calculating your credit score. Paying your bills on time should help improve your credit score, but it may take a while to see the impact.
2. Pay off a lot of credit card debt
If you have a ton of cash on hand and don’t need all of it to put down a down payment on your home, consider using some of it to reduce your existing credit card debt. Doing so should reduce your credit utilization, another important factor in calculating your score. If you manage to significantly reduce this ratio, you should see your credit score improve very quickly.
3. Correct incorrect information on your credit report
Your credit report may contain errors against you, such as delinquent debts you have paid off or never occurred. Correcting these mistakes can mean your score improves within a month or two, so it’s worth reviewing your credit report and working to resolve the misinformation in it.
Your credit score may be comparable to that of a recent first-time homebuyer. However, if your score is low, you may need to work on improving your score before applying for a mortgage. On the other hand, your credit score may be higher than 746. If so, you should be able to handle the mortgage application process with confidence.