Buying a home is the dream for most Americans, but while it's a common process, many steps are involved. One of the most crucial steps is securing a mortgage loan to pay for the house. However, even though you qualify for a loan, it must still be a good deal. If your credit score is relatively low, you might pay six figures in interest payments alone.

So, before shopping around for a house with AZ House Treasure, improving your credit score as much as possible is imperative. Although it may seem easy, it can take a while to see it go up, especially if you already have a lot of debt. With the right planning and perseverance, your score could get higher sooner than you think.

How Does Your Credit Score Impact a Mortgage Loan?

As a rule, you must have a credit score between 620 and 800 (the highest number). The lower your score, the higher your interest payments and the less you can borrow from your lender. That's because your credit score tells lenders how likely you will repay the loan. So, if you have a high score, you can borrow a lot without as much risk of defaulting. If your score is too low, you won't be able to qualify since you're too much of a risk.

In 2023, interest rates are high due to inflation, but historically, a reasonable interest rate is around 3 - 3.5 percent. On average, if your score dips below 700, you can pay around 0.25 percent more for interest for every 20 points. So, with a score of 700, your interest rate may be 3.5 percent (6.6 percent in 2023). But, with a score of 650, that rate could become 4.4 percent or higher (7.4 percent in 2023).

While the difference between these percentages may not seem like a lot, remember how much you borrow. For a $250,000 loan, 3.5 percent interest equates to $8,750. At 4.4 percent interest, you'd be paying $11,000.

What's a Good Credit Score to Buy a House?

As a rule, your score should be at least 700 before meeting with mortgage lenders and deciding on real estate for sale. While you can qualify for a home loan with a lower score, you'll pay more in interest and get a smaller loan, so there's a trade-off. Your score should be 720 or higher, but that might not be feasible for some people.

How to Raise Your Credit Score

Your credit score averages three ratings from the major credit reporting agencies - Equifax, Experian, and TransUnion. They calculate your score based on the following criteria (in order of importance):

• Payment History - Do you have any late or missing payments?
• Amount Owed - How much debt do you have right now?
• Length of Credit History - How long have you had a credit account?
• Credit Mix - Is your debt a mix of credit cards and loans?
• New Credit - Have you recently taken out any new credit cards or loans?

Based on those criteria, here are the steps to improve your score. Also, remember that it could take weeks or months to see improvement, so don't get discouraged if it doesn't go up immediately.

Pay Off Debt

While your payment history counts toward your score more than anything else, borrowing too much will hurt your score. As a rule, you shouldn't have more than 30 percent of debt compared to your credit limit. For example, if your credit limit is $30,000, your debt should be $9,000 or less.

This 30-percent ratio is important because it means you don't have to be entirely debt-free to see your score go up. Instead, calculate how much you need to pay off to reach that threshold and make that your initial goal. You should try to be as debt-free as possible, so don't assume 30 percent is good forever.

Increase Your Credit Limit

Paying off debt is one way to reduce your percentage, but the other is to increase your credit limit. If you have credit cards, you can request a credit line increase. For example, let's say you have a total credit limit of $20,000 across three cards. You request increases on two of them, raising your limit to $30,000. Thirty percent of $20,000 is $6,000, while 30 percent of $30,000 is $9,000. You essentially gave yourself an extra $3,000 buffer without paying anything off.

Don't Open New Accounts

If you're trying to increase your credit limit, you may be tempted to open several new credit cards simultaneously. However, doing this will severely impact your score, and the benefits will be negligible. Instead, paying off existing debt is better than opening a new card to increase your limit. Generally, you should request credit increases on cards you already have to avoid the penalty of opening a new account.

Pay Off Defaults

Defaults are missed payments or outstanding debt that has gone to a debt collector. These can significantly hurt your credit score, especially if they stay on your report too long. If possible, pay off any defaults before lowering your total debt since they hurt you the most. You may also be able to negotiate a debt reduction with collectors if the amount is too high.

Other Considerations When Buying a House

While improving your credit score is important, it's not the only thing to do when buying a house. Other factors include:

• Debt-to-Income (DTI) Ratio - This metric measures how much debt you pay compared to how much you make monthly. If your DTI is too high, you won't qualify for a loan.
• Income History - Lenders are looking for job stability, so if you have just started a new job (even if it pays more), you may have trouble getting accepted.
• Down Payment - Generally, your down payment should be about 3.5 percent of the home's value, depending on the type of loan you're getting. In some cases, you may need as much as 20 percent.
• Co-Signers - If your credit score isn't very strong, you can co-sign with someone with a better score. Co-signing improves your chances of getting a higher loan with a lower interest rate.

Find Your Dream Home with AZ House Treasure!

Buying a home is an exciting experience when you have the support necessary to find your dream house. Let AZ House Treasure be your ally in getting you into the place you want with the right budget for your needs! Contact us today to get started.