How to Improve Your Credit Score for a Mortgage

Why Your Credit Score Matters for a Mortgage

Your credit score is a three-digit number that tells lenders how likely you are to repay borrowed money. For mortgage lenders, it is one of the most critical factors in determining whether to approve your loan and what interest rate to offer you. A higher score signals lower risk, which translates directly into a lower rate and significant savings over the life of your loan.

To put this in concrete terms, consider a $350,000 mortgage on a 30-year fixed term. The difference between a 6.0% rate and a 6.5% rate is roughly $120 per month, which adds up to more than $43,000 in additional interest over the full 30 years. That half-percent difference in rate can often be the gap between a 720 credit score and a 680 credit score. Small improvements in your score can lead to meaningful financial savings.

Most conventional loan programs require a minimum credit score of 620, while FHA loans may accept scores as low as 580. However, the best rates are typically reserved for borrowers with scores of 740 and above. Understanding where you stand and what you can do to improve gives you more control over the terms of your mortgage.

Check Your Credit Report for Errors

Before you do anything else, pull your credit reports from all three major bureaus: Equifax, Experian, and TransUnion. You are entitled to one free report from each bureau every year through AnnualCreditReport.com, the only federally authorized source for free credit reports.

Errors on credit reports are more common than most people realize. Studies have found that a significant percentage of consumers have at least one error on their reports that could affect their score. Common errors include accounts that do not belong to you, incorrect balances, payments reported as late when they were actually on time, and old negative items that should have been removed.

Review each report carefully. If you find an error, file a dispute directly with the credit bureau reporting the incorrect information. The bureau is required by law to investigate within 30 days. If the error is verified, it will be corrected or removed, and your score will update accordingly. For some borrowers, correcting a single error can result in a score increase of 20 points or more.

Pay All Bills on Time

Payment history is the single largest factor in your credit score, accounting for approximately 35% of the total. Even one late payment of 30 days or more can drop your score by 50 to 100 points, and that negative mark stays on your report for seven years.

If you are planning to buy a home in the next 6 to 12 months, make on-time payments your absolute top priority. This applies to every account that reports to the credit bureaus, including credit cards, car loans, student loans, personal loans, and medical bills that have been sent to collections.

Set up automatic payments or calendar reminders to ensure you never miss a due date. If money is tight, even making the minimum payment on time is far better for your credit score than missing the payment entirely. If you have any accounts that are currently past due, bring them current as quickly as possible. While the late payment will remain on your report, the impact on your score diminishes over time, and lenders also want to see that you are currently managing your obligations responsibly.

Reduce Your Credit Utilization

Credit utilization is the second most influential factor in your score, accounting for about 30%. It measures how much of your available credit you are currently using. For example, if you have a credit card with a $10,000 limit and a $3,000 balance, your utilization on that card is 30%.

Lenders and scoring models view lower utilization as a sign of responsible credit management. As a general guideline, try to keep your utilization below 30% across all accounts. For the best possible impact on your score, aim for below 10%. Borrowers with the highest credit scores typically have utilization rates in the single digits.

There are several ways to lower your utilization:

• Pay down existing balances. Focus on cards with the highest utilization first. Even paying down $500 or $1,000 on a high-balance card can make a noticeable difference.
• Make multiple payments per month. If you use your credit cards regularly for everyday spending, your reported balance can be high even if you pay the full statement each month. Making payments twice a month or right before the statement closing date keeps your reported balance lower.
• Request a credit limit increase. If you have a good payment history with a card issuer, asking for a higher credit limit instantly lowers your utilization ratio without requiring you to pay anything down. Just be careful not to increase your spending along with the limit.
• Keep old accounts open. Closing a credit card removes that available credit from your total, which can increase your utilization ratio across remaining accounts. Even if you rarely use an old card, keeping it open helps your score.

Avoid Opening New Credit Accounts

In the months leading up to a mortgage application, avoid opening any new credit accounts unless absolutely necessary. Every time you apply for new credit, the lender performs a hard inquiry on your credit report. Each hard inquiry can lower your score by a few points, and multiple inquiries in a short period can add up.

More importantly, opening a new account reduces the average age of your credit history, which accounts for about 15% of your score. If you have credit accounts averaging 8 years and you open a brand-new card, your average age drops, and your score takes a hit.

This means avoiding store credit cards (even if they offer a tempting discount at checkout), new auto loans, and personal loans in the months before and during the mortgage process. The one exception is mortgage shopping itself. If you apply for pre-approval with multiple mortgage lenders within a 14 to 45 day window (depending on the scoring model), all of those mortgage inquiries are counted as a single inquiry because the scoring models recognize you are rate shopping, not opening multiple accounts.

Similarly, avoid co-signing for anyone else's loan or credit application. When you co-sign, that debt appears on your credit report and is factored into your debt-to-income ratio, which can affect your mortgage qualification.

Be Patient — It Takes Time

Improving your credit score is not an overnight process. While some changes, like correcting an error or paying down a credit card balance, can show results within one to two billing cycles (30 to 60 days), more significant improvements require consistent behavior over several months.

If your score needs substantial improvement, give yourself at least 6 to 12 months of focused effort before applying for a mortgage. During that time, make every payment on time, reduce your credit card balances steadily, and avoid new credit applications. The compounding effect of these habits over several months can result in meaningful score increases.

Here is a realistic timeline for common score-improvement actions:

• Correcting a credit report error: 30 to 45 days after filing the dispute
• Paying down credit card balances: 30 to 60 days after the lower balance is reported
• Recovering from a missed payment: 3 to 6 months of consistent on-time payments
• Building credit history from limited history: 6 to 12 months of responsible account management
• Recovering from a major negative event (bankruptcy, foreclosure): 2 to 4 years of rebuilding

The most important thing is to start now. Even if you are not planning to buy a home for another year, the steps you take today will directly impact the mortgage rate and terms you are offered when the time comes.

If you are unsure where you stand or want personalized advice on improving your score before applying, contact Adam Styer and The Styer Team. We have helped countless Austin buyers prepare their credit for a mortgage, and we are happy to review your situation and create a plan that works for you.