How Important is Your Credit Score when Moving up to a Larger Home?
Updated: Nov 18, 2022
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You worked hard six or seven years ago to pay off your loans, pay down your credit cards, and save up a down payment for a practical little two-bedroom fixer upper. You put a ton of sweat equity into the home, got married, and have made the decision to start a family. Looking ahead, you realize it’s time to move up to a larger home.
Thank goodness you have equity in your home and don’t have to go through that credit-building nightmare again. Right?
…Sorry to disappoint. The truth is, your credit score is the single most important factor in determining your eligible rate when buying a home. Here’s everything you need to know about your credit score when moving up to a larger home.
What’s a Good Credit Score for a New Home Purchase?
Typically, any scores over 740 will have access to the best rates, amounting to significant savings monthly and over time. If your score is under 680, you will really start seeing hits in the pricing you will be eligible for—and sometimes the loan program.
Credit scores also impact how expensive your private mortgage insurance (PMI) will be. If you’re planning to make less than a 20% down payment on your next home, your lender will require you to carry PMI. Those companies also take your credit score into account when calculating your cost of insurance.
How Do You Prepare Your Credit Score for a New Home Purchase?
Your credit score is the “open sesame” password to your move-up home purchase. Therefore, it’s important to make sure your accounts are in order before listing your current home on the market or starting your next home search.
Here are a few tips for preparing your credit score for a new home purchase:
Make Payments on Time
First and foremost, it is important to make your payments on time. This is, of course, important to see in the mortgage history for your current home. But all outstanding payments are liable to affect your overall credit score. Your first steps should be making sure you’re not behind on any bills.
Control Your Credit Activity
There are many other factors impacting your eligible mortgage rate. These include your balance-to-limit ratio on revolving debt, number of recent credit inquiries (too many is never a good thing), and time since you’ve last utilized any credit. A good rule of thumb is to utilize less than 30% of your available credit card limits and try to pay them off each month.
Keep an Eye on Medical and Utility Collections
One thing that often catches people with otherwise good credit off guard are collection accounts from medical or utility bills. Sometimes when people move, they don’t receive mail that could indicate a small balance from a utility bill that rolled over or a doctor’s office visit. When those accounts go to collection, it can impact your credit score by more than 100 points! Check your credit score well before you apply for mortgage pre-approval to prevent any surprises.
In short, make sure you’re following these five steps:
Review a free copy of your credit report for any errors or missed payments.
Dispute any credit or payment information that is incorrect.
Pay bills consistently and on time.
Work to pay down credit cards to below 30% of their usage (more if possible).
Avoid taking out additional loans or credit lines in the year leading up to your projected home purchase.