What You Should Know About Credit and Buying a House


Getting a mortgage and buying a home requires proof of employment and a regular income source. However, it takes more than a job to qualify for a purchase. You also need a credit history.

A lender will use your credit history to determine whether you can be trusted to repay a mortgage loan. Some people apply for a home loan without understanding how credit affects a bank’s decision. The more you know about credit, the more you can prepare for a home loan. Here are four things you should know about credit and buying a house.

1. It doesn’t have to be perfect

Some people put off purchasing a home because they think their credit has to be perfect to qualify for the loan. This isn’t the case. It’s true that most lenders will not approve your application if you have more than one 30-day late payment within the past 12 months. They will, however, consider an approval if you have a minimum credit score of 620 (500 to 580 if you’re applying for an FHA home loan). So if you’ve had credit problems in the past, but you’re improving your credit habits and slowly building your FICO score, you can purchase a home despite a less-than-perfect score.

2. Credit affects your interest rate

Your mortgage interest rate determines your monthly payment, as well as how much you pay in interest over the next 30 years. To get the best rate, you need a high credit score. So while it is possible to qualify for a mortgage with a low credit score, you’ll also pay more because of your lower rating. If you can, postpone purchasing a house until you’re able to increase your score. This may involve delaying a purchase for one or two years. In the end, you’ll qualify for a lower rate, which can increase purchasing power and help you save on interest.

3. Lenders check credit reports twice

Be aware that your home loan lender will check your credit report twice. The first credit check occurs when you initially apply for the mortgage. This includes a review of your credit score, payment history and debt ratio. The lender will check your credit again a few days before closing. So it’s important to maintain good credit from the time you apply up until closing. Continue to pay your bills on time and don’t add new debt. If negative information hits your credit report after a pre-approval, this can jeopardize your mortgage approval.

4. Check your credit at least six months before buying a home

If you plan to buy a home in the future, now’s the time to check your credit report. You should check your report at least six to 12 months before applying for a mortgage loan. This provides time to correct errors on your report and dispute fraud. Being a victim of fraud or a creditor error can hurt your chances of getting a mortgage. You’ll need to correct these issues before a bank will approve your home loan request. Fortunately, checking your own credit report doesn’t count as an inquiry. You can order one free report from each of the bureaus by visiting AnnualCreditReport.com.