Why Your Credit Score Matters for a Mortgage
Your credit score is the single most important factor in determining your mortgage interest rate. The difference between a 680 score and a 760 score on a $400,000 30-year mortgage can mean $200-400 more per month — that is $72,000-$144,000 over the life of the loan. Spending 3-6 months improving your credit before applying is one of the smartest financial moves you can make.
- 760+ score — Best rates available. You are a prime borrower
- 700-759 — Good rates. Slightly above best available
- 680-699 — Decent rates. About 0.25-0.5% higher than prime
- 620-679 — Higher rates. May need FHA loan. Expect 0.5-1.5% above prime
- Below 620 — Difficult to qualify for most mortgages. Focus on credit repair first
Quick Wins — Boost Score in 30-60 Days
- Pay down credit card balances — Get utilization below 30%, ideally below 10%. If your limit is $10,000, keep balance under $1,000. This alone can boost score 20-50 points
- Dispute errors on credit reports — 1 in 5 Americans has an error on their credit report. Check all three bureaus (Equifax, Experian, TransUnion) at annualcreditreport.com. Dispute anything incorrect
- Become an authorized user — Ask a family member with excellent credit and a long-standing card to add you. Their payment history boosts your score
- Request credit limit increases — Higher limits lower your utilization ratio instantly. Do not spend more — just get the limit raised
- Pay bills twice per month — Credit card balances are reported to bureaus on your statement date. Paying mid-cycle keeps reported balance low
Medium-Term Strategies — 3-6 Months
- Never miss a payment — Payment history is 35% of your score. Set up autopay for at least the minimum on every account. One missed payment can drop your score 50-100 points
- Keep old accounts open — Length of credit history matters (15% of score). Do not close your oldest credit card even if you do not use it. Charge a small recurring bill and set autopay
- Avoid new credit applications — Each hard inquiry drops your score 5-10 points. Do not open new credit cards, car loans, or store cards in the 6 months before your mortgage application
- Diversify credit mix — Having both revolving credit (credit cards) and installment loans (car loan, student loan) helps your score. But do not take a loan just for this reason
- Pay off collections — Negotiate with collectors for "pay for delete" agreements. Once removed from your report, the negative impact disappears
What NOT to Do Before a Mortgage Application
- Do not close credit cards — Reduces available credit and increases utilization ratio
- Do not open new accounts — Hard inquiries and new accounts lower average age of credit
- Do not max out cards — Even if you pay in full monthly, the statement balance is what gets reported
- Do not co-sign loans — The full loan amount appears on your credit report as your debt
- Do not change jobs — Lenders want to see 2 years of stable employment. Job changes can delay or derail your application
- Do not make large purchases on credit — That new car or furniture set increases your DTI and can kill your mortgage approval