By Alena Kairys

Sep 22, 2022

You probably already know that credit score plays an important role when buying a home, but understanding how credit affects your ability to buy a home goes beyond a simple number. Let’s breakdown some of the most common credit questions from aspiring homeowners.

Will it help my credit score to close a credit card I’m not using?

You might think closing a seldom-used credit card will improve your credit score, but this is the last thing you should do. When you close your credit card, you’re reducing your available credit, which will drive down your score. Instead, use your card for small purchases every now and then and pay it off in full. Consider designating it for minor recurring payments, such as a subscription service. Doing this will prevent the bank from closing your account for inactivity and can benefit your score since you won’t carry a balance.

What’s the difference between a FICO score and the score I get from free credit score sites?

You’ve probably seen ads for sites that let you check your credit score for free, but they don’t always paint a full picture of your credit health. If you’ve relied on the information from one of these sites, it may come as a surprise if your lender reveals a credit score that’s very different. FICO is the primary model mortgage lenders use to review your credit, but some credit sites use a totally separate model called VantageScore. Since FICO scores and VantageScores are calculated differently, there can be a sizable disparity between the numbers. For home buying purposes, it’s better to refer to your FICO score. To get your free FICO credit score, visit the Experian site.

Will it hurt my credit score to apply with other lenders?

When you find a lender to get pre-approved, they’ll perform a hard credit inquiry to get a detailed look at your credit situation. A hard credit pull will slightly decrease your score because your credit report is being accessed for application approval, but soft credit pulls (like checking your credit score) won’t affect it. The drop is usually 5-10 points, and your score will rebound in a few months if there are no negative changes to your credit. If you still aren’t sure which lender to choose, you’ll have a 3 to 4-week window where any hard mortgage credit pulls will be counted as a single inquiry and won’t further reduce your score. If your credit goes through another hard inquiry after that timeframe, it will affect your score. 

What’s the quickest way to increase my credit score?

Increasing your credit score is like working out—you won’t see the results you want overnight. The best way to improve your credit score is to establish and maintain good credit habits.

Paying bills on time may not sound like a huge deal, but payment history accounts for a whopping 35% of your FICO score! Consistently making timely payments will increase your credit score and make you seem more reliable as a borrower. Keep in mind that making the minimum payment will prevent your score from falling if you’re tight on funds, while paying it in full will have a larger impact on your credit.

Just because you’re able to pay with credit doesn’t mean it’s a good idea to use all of it at once. The percentage of how much credit you’re using in relation to available credit is called your credit utilization ratio, and it accounts for 30% of your FICO score. When you’re close to your credit limit, it hurts your score and makes you appear financially risky. Aim to keep your utilization ratio low and use around 30% of your available credit. You can determine your ratio by dividing the total credit limit of your credit cards by your total balance and multiply that number by 100.

Paying down debt is another way to improve your score. It will also reduce your debt-to-income ratio (DTI), which will increase how much you can afford for a home.  Pay special attention to debt with high interest, as it will accumulate rapidly.

I’m not planning on buying a home right now, but how can I financially prepare when I’m ready?

Even if homeownership isn’t in your immediate future, it’s never too early to put yourself in a solid financial position for when the time is right! Improving your credit worthiness will play a significant factor in being able to buy a home, but there are other areas that are important, too.

The period where you’re gearing up to buy is an ideal time to start a home savings fund. If you can put a portion of your paycheck into savings each month, the amount will grow over time. You might also want to create a budget to manage your expenses and see where you can cut back. While the “requirement” of needing 20% down to buy a home is a misconception, it’s wise to have a solid level of savings when you apply for a mortgage. In addition to reducing existing debt, avoid taking out new, unnecessary debt. This doesn’t necessarily mean you need to be debt-free to buy a home, but having fewer debts means a lower DTI ratio and more purchasing power.

There are numerous myths about credit out in the wild, and it’s easy to believe them if you’re unfamiliar with how credit scores work. When you have a basic understanding of best credit practices, you can be better prepared when you apply for a mortgage.

If you have any questions or want more information about loan programs, contact one of our Licensed Mortgage Loan Originators. If you are ready to begin the homebuying process, click here to get started!

NFM Lending is not a credit repair agency, financial advisor, or debt settlement company.

These blogs are for informational purposes only. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas. Offers may vary and are subject to change at any time without notice. Should you have any questions about the information provided, please contact us.