How to Build Credit to Buy a House

Your credit score may affect your ability to qualify for a home loan as well as the interest rates and terms a lender may offer.
You may build credit to buy a house by using credit cards another other loans or lines of credit responsibly, keeping credit balances low, and paying your bills on time every month.
Additional measures, such as disputing errors on your credit report or negotiating with creditors to remove negative marks from your report, may also be taken to improve credit scores.

Your ability to secure a mortgage loan to buy a home depends largely on your financial profile, which includes your credit score. While credit score requirements vary by loan type and lender, you may need a score of at least 620 to qualify for a home loan (although scores below 600 may be considered by some lenders for FHA loans).

Importantly, a higher credit score doesn’t just increase your chances of being approved for a home loan; it may also earn you better financing terms. Higher credit scores indicate less risk for mortgage lenders, so they might earn you lower down payment requirements or lower mortgage interest rates.^[1]

Building credit to buy a house isn’t difficult, but it may take some time. And the strategies for building good credit aren’t necessarily intuitive, so it’s helpful to understand how different financial decisions may affect your credit score.

This article will explain how to build credit to buy a house, including:

How credit scores work
How to build credit from scratch
How to improve poor credit
Long-term strategies for maintaining excellent credit

How To Build Credit To Buy a House

Your credit score is a numeric representation of how responsibly you manage debt. Building credit to buy a house requires establishing a history of using debt responsibly. This is why it may take several months, or even years, to achieve an excellent credit score.

Your credit score (under the commonly used FICO score model) is based on five main factors:^[2]

Payment history. Making debt payments on time tends to help your score, while late payments or missed payments may hurt your score. Payment history is the most important factor, accounting for 35% of your score.
Amounts owed. Owing money does not count against you, but owing too much might. Credit accounts with high balances (generally meaning balances over 30% of the available credit limit) may count against your score. For example, if you have a credit card with a $5,000 limit and a $2,500 balance, the credit utilization ratio would be 50%. If you can keep the balance below $1,500 (30% of $5,000), your credit score may improve. This accounts for 30% of your credit score.
Length of credit history. A longer credit history may help improve your score, but it is not necessarily required for a good score. The longer you maintain active credit accounts, the longer your credit history. This is why many borrowers see their credit score decline temporarily after paying off a long-standing account (like a student loan or mortgage). This accounts for 15% of your score.
Credit mix. Your credit mix is the balance of different debt types in your credit profile, such as installment loans, credit cards, and retail store accounts. You don’t need to have one of each type of debt, but a profile that includes more types than just credit cards may earn a higher score. This accounts for 10% of your score.
New credit. Opening new credit lines may cause a temporary dip in your credit score because research has shown that borrowers with multiple new accounts tend to carry additional risk of defaulting on loans.^[2] New credit accounts for 10% of your credit score.

Understanding how these factors work together allows you to build, repair, or maintain credit strategically.

How To Build Credit Quickly and Efficiently

If you have very little credit and you’re looking to build your credit profile and increase your score to buy a home, try these tips to build credit quickly:

Becoming an authorized user on someone else's credit card. Do you have a friend or family member with good credit and a long-standing credit card account? Ask if they can list you as an authorized user. This may allow the long record of on-time payments to be added to your credit report, which may boost your score.
Use a credit card responsibly. Opening a new credit card may cause a temporary drop in your credit score by reducing your length of credit and creating a new credit record, but using the card for common expenses like gas or groceries and paying it off in full each month may boost your score quickly and help you maintain a good score over time. If you don’t have enough credit history to qualify for a credit card, consider starting with a secured credit card, in which you pay a deposit upfront to cover the card’s limit.
Consider using loans for large purchases. In some cases, it makes sense to leverage debt for purchases, especially if you can find a loan with an introductory interest-free period. For example, if you need a new computer, using store credit from an electronics retailer with 0% APR for one year could help you get the computer now, avoid interest as long as you pay off the loan within the year, and build your credit through on-time payments.
Get credit for paying rent and utilities. Ask your landlord and utility companies if on-time payments can be reported to the credit bureaus. Just make sure your apartment lease and utilities are in your name so you get credit.

Steps To Improve Your Credit Score

If you have some established credit, but you’re not satisfied with your score, consider these tips for improving it:

Check your credit report for errors. Errors on your credit report may impact your ability to qualify for loans.^[3] So it’s important to review your credit report periodically and dispute any errors with the credit bureaus.
Contact creditors. If you have past-due debts or accounts in collections, contact your creditors to see if they are willing to remove the negative mark from your credit history if you bring the account current.
Pay your credit balances down. If you can get your credit utilization ratio below 30% on your credit cards, you may see your score improve.

Long-Term Strategies for Maintaining a Good Credit Score

To keep your credit score high for the rest of your financial life, consider following these tips:

Automate your bill payments. Automating payments may prevent late or missed payments.
Use credit cards, but pay them off each month. Using credit cards gives you more opportunities to show that you handle them responsibly. Paying off your credit card balance in full each month helps you avoid interest expenses.
Space out your new accounts. Try to leave a few months between new accounts to minimize the negative impact of opening multiple new credit lines.
Keep old accounts open if possible. Rather than closing credit lines when the balance is paid off, keep them open to improve your credit length and credit utilization ratio.

How Credit Inquiries Affect Your Credit Score

Many homebuyers are surprised to learn that credit inquiries may take a few points off their credit scores. A credit inquiry is when a lender “pulls” your credit report to see if you qualify for a new loan. “Hard pulls” may have a slight, temporary impact on your score because they signal that a new line may be added to your credit report soon. “Soft pulls” may not affect your credit.

When you apply for a mortgage loan, or even a pre-approval (which is often done in the early stages of house hunting to help you understand how much you might qualify to borrow), the hard credit inquiry may cause a temporary dip in your score. Some lenders offer preliminary pre-approval, which helps you understand your likelihood of qualifying for a mortgage without requiring a hard pull that would affect your credit score.

The threat of a hard pull should not prevent you from shopping multiple lenders because there is a 45-day window during which credit checks from multiple mortgage lenders are reported as a single inquiry against your credit.^[4]

Other Factors that May Affect Your Ability To Qualify for a Mortgage

As you financially prepare for a home loan, remember that your credit score is only part of the qualification criteria. The following factors may also be considered:

Down payment amount. Depending on your loan type and financial profile, you may need to put at least 3-10% down to qualify for a home loan (0% options are available for those who qualify for VA loans through military service or USDA loans by purchasing qualified homes in eligible rural areas). However, if you can put 20% down, you may save money by avoiding private mortgage insurance (PMI).
Debt-to-income (DTI) ratio. DTI ratios measure debt obligations as a percentage of pre-tax income. Keeping your monthly debt payments below 36% of your gross income may improve your ability to qualify for a home loan.
Employment history. You may need to show job stability by providing details of your employment history for the last few years (doctors using physician loans to buy a home may be exempt).

Why It’s Important To Get Pre-Approved Early

In the homebuying process, getting pre-approved should happen even before house hunting begins. Pre-approval involves having a lender review your finances and your credit to see how likely you are to qualify for a home loan and how much you may be able to borrow. This can inform your budget so you start looking in the correct price range from the beginning. It also strengthens your offer by assuring the sellers that you are likely to qualify for the financing needed to close the deal.

Learn more about pre-approval and get one step closer to homeownership today!