By Alicia Michele Benjamin
In addition to building savings, another way to prepare for the dream of becoming a first-time homeowner is to build credit and make sure that it’s in good shape.
A higher credit score may help borrowers qualify for a mortgage and get a lower interest rate, potentially saving thousands of dollars over the life of a loan. According to Equifax, lenders often use credit scores to decide whether borrowers will be able to pay their mortgage.
One of the best ways to build strong credit is to pay bills on time. The Consumer Financial Protection Bureau (CFPB) reports that payment history is one of the biggest factors that affect credit scores, according to its December 2024 website article, “How do I get and keep a good credit score?” Missing payments can lower a score, while making on-time payments month after month can help build a positive credit history. Setting up automatic payments or reminders can help borrowers stay on track.
It’s also important to keep credit card balances low. In the article, CFPB says that the amount of credit a person uses affects credit scores. The piece goes on to say that experts recommend that buyers use less than 30% of available credit. Also, paying off balances as much as possible can help lower debt and improve credit.
Future homebuyers should also avoid opening new credit accounts, according to the CFPB. Applying for multiple credit cards or loans in a short period of time can temporarily lower a credit score.
Checking credit reports for mistakes is also important. In their website article, “How to Improve Your Credit Scores to Help You Buy a Home,” Equifax tells buyers to review their credit reports regularly and report any errors they find. Wrong information, such as accounts that don’t belong them or payments that are reported incorrectly, can have a negative impact on their credit score.
Creating a positive financial history over time is important, according to the CFPB. ”The more experience your credit report shows with paying your loans on time as agreed with your lenders, the more information there is to determine that you are a good credit recipient,” the CFPB article says.
Experts also say it’s important to start early. Equifax recommends hopeful homebuyers give themselves time to improve their credit score before applying for a mortgage because it may take several months for their credit score to show improvement.
It’s also important for future homebuyers to start the habit of saving money regularly. According to a Wells Fargo website article “How to Build Your Credit and Savings for a New Home,” future homebuyers should focus on building credit and savings while they’re preparing to buy a home. A solid savings account can help cover a down payment, closing costs, moving expenses and unexpected repairs after buying a home. In their article, Wells Fargo recommends that future homebuyer’s factor in saving money when creating a budget.
Also in the article, Wells Fargo advises hopeful homebuyers to avoid taking on lots of new debt before they apply for a mortgage. Buying big purchases like cars or furniture financed through loans that can increase debt, work against mortgage applicants. Lenders may see this as a sign that the hopeful homebuyer who is applying for the loan isn’t credit ready.
Improving credit scores doesn’t happen quickly. It’s important for future homeowners to start early, pay bills on time, keep credit card balances low, review credit reports regularly and build significant savings to increase savings alongside credit. Following these tips can improve future homeowners’ chances of being in a position to achieve their dream of owning a home.
Sources
Equifax
- How to Improve Your Credit Score Before Buying a Home
Consumer Financial Protection Bureau (CFPB)
- How do I get and keep a good credit score?
Wells Fargo
- How to Build Your Credit and Savings for a New Home