Two Best Ways to Improve Your Credit Score Before a Mortgage Application

A new report from the credit score developer FICO reveals two of the best ways home buyers can improve their credit scores before applying for a mortgage loan. Pay your bills on time, and reduce your “amounts owed.”

We’ve known for some time that “payment history” and “amounts owed” are the two biggest factors that can influence a person’s credit score. But now we have some in-depth analysis to support that claim.

Why Credit Scores Matter to Mortgage Applicants

Your credit score is a three-digit number that’s computed from the information contained within your credit reports. Those reports are a record of your borrowing history dating back several years, and they include things like credit cards, auto loans, mortgages, etc.

FICO scores are produced by the company of the same name. They are commonly used by banks and lenders when reviewing loan applicants, such as home buyers applying for a mortgage loan.

The FICO scoring range goes from 300 to 850. A higher number is better. Home buyers with higher credit scores tend to qualify for lower mortgage rates. They also have an easier time getting approved for loans in the first place.

On the other hand, borrowers with lower scores tend to pay more in interest and might have a harder time qualifying for financing.

The bottom line: if you’re planning to use a mortgage loan in the near future, you should know (and care about) your credit score. It will affect everything from your ability to quality for financing, to the interest rate that’s assigned to your loan.

Improving Your FICO Score

But what if you’re one of the folks with a relatively low score? How can you improve your credit score before applying for a mortgage loan? Two of the best strategies are to (A) pay your bills on time going forward, and (B) consider reducing your debt load or “amounts owed.” These factors weigh more than any other when it comes to the automated credit-scoring formulas.

FICO scoring factors

Which brings us back to the FICO report mentioned earlier. They company analyzed FICO score distribution data among home buyers who used a mortgage loan to buy a house. The resulting report offered a wealth of insight into how these score are generated, and how they affect consumers who are shopping for a home loan.

They also highlighted two ways a person could improve a credit score before applying for a mortgage loan. One strategy is for consumers with higher recurring debt balances to reduce those debt loads. High credit card balances were singled out, in particular, because those can have a negative impact on a person’s credit score.

As the report stated:

“Our analysis found that consumers with a FICO® Score increase were more likely to have reduced their amounts owed. ‘Amounts owed’ makes up about 30% of the FICO® Score calculation; not having high revolving balances and paying down installment debt are two indicators of a healthy credit profile.”

That company explained that those consumers with an increase in their credit scores reduced their credit card balances by an average of 49%.

Here’s the part that relates to payment history:

“We also found that as of April 2018, consumers with a decrease in [their scores] were much more likely to have had a missed payment in the past year. ‘Payment history’ is the most important category within the FICO® Score, comprising ~35% of the total score calculation.”

It bears repeating: How you pay your bills counts more than any other factor, when it comes to calculating that three-digit number. Consumers who regularly miss payments on things like credit cards and car loans tend to have lower scores, while those who stay on top of their bills usually have higher numbers.

One Piece of a Bigger Picture

Credit scores are one of the most important qualification criteria for home buyers seeking a mortgage loan. But they’re also part of a bigger picture. Banks and mortgage lenders look at a variety of factors when considering applicants for a loan.

In addition to credit scores, they also look at the amount of money a person earns relative to the amount they spend on their recurring debts. The debt-to-income ratio, as it’s known, is another important factor that can determine whether or not you qualify for a mortgage loan. Income stability is another key factor when it comes to getting a home loan.

That three-digit number is important for mortgage applicants. But it’s not the only consideration.

Disclaimer: This article offers tips on how to improve a credit score before shopping for a mortgage loan. That information was adapted from a report provided by the FICO credit-scoring company. Their information and findings are deemed reliable but not guaranteed. The publishers of this website make no claims about the efficacy of the above-mentioned strategies and advise consumers to conduct additional research.