Credit, Debt and Savings, When Buying a House (2024)

Your credit. Your debt. Your savings.

Your credit

Your credit is a measure of how you’ve managed loans, credit cards, and other payments. Your credit history is listed in a credit report, while a credit score is like a grade that is given based on the information from your credit report. It is used by lenders to evaluate your creditworthiness as a borrower.

When you’re preparing to buy a home, it’s a good idea to start by obtaining a copy of your credit report early; viewing it will let you know what lenders see and help you to better understand the information that helps determine your credit score.

A credit report includes nearly everything about your credit situation, from which credit cards you have to how long you’ve lived at your current address. You can order your free annual copy of your credit report from annualcreditreport.com. You may also be able to order a copy within 60 days of being denied credit or if your report is inaccurate because of fraud, including identity theft.

One thing your credit report does not include, however, is your credit score. Often, you can get your credit score for free from your bank. A higher credit score generally means you’re managing your credit well, not borrowing more than you can afford, and paying all your bills on time. A higher credit score may mean lower interest rates and more choices on a mortgage because lenders use your credit score to help decide whether they’ll approve your application for a loan.

The most common credit score is a FICO^® (Fair Isaac Corporation) credit score, which typically ranges from 300 to 850. The higher your score, the more options you will have in obtaining a mortgage. Each of the three major credit reporting agencies — Equifax^®, TransUnion^®, and Experian™ — report your credit score. Keep in mind that each of these bureaus uses a slightly different scoring model, so your score may vary slightly from one bureau to another.

When a lender begins to review your financial health as part of your mortgage application, they use a different type of credit report. It’s called a tri-merge credit report and it combines reports from all three major consumer credit bureau reports into one report. While the report doesn’t combine the credit scores from each bureau it does list all three. Most mortgage lenders use the middle score for loans without a co-borrower or the lower of the two middle scores if there is a co-borrower.

Different lenders have different guidelines, meaning your credit score could qualify you for a loan at one lender but not another. And remember that your credit score is one of many factors — such as your income, monthly debt payments, and credit history — that may influence loan-approval decisions. For those reasons, there isn’t a predetermined score that ensures you’ll get a mortgage.

Your debt

When you apply for a home loan, lenders will look at your debt to help determine whether you can afford to take on another payment. They use a calculation called debt-to-income ratio (DTI).

Debt isn’t necessarily a negative on a loan application, as long as your total debt doesn’t exceed a certain percentage of your income. Having a debt-to-income ratio of 35% or less is a good rule of thumb.

On the other hand, having no debt and no credit cards may actually lower your credit score because you aren’t building a history of good credit habits.

However, it’s important to know that making large purchases with loans or credit cards, or opening a new credit card account just before applying for a mortgage, may impact your ability to qualify — so consider your needs and priorities carefully.

Your savings

If you’re considering buying a home, you’ll need to have cash on hand to cover expenses, including down payment and closing costs.

Your down payment may vary, depending on the type of loan you choose.

You’ll also need to pay for the costs connected with closing the sale on your home, which include origination fees for a mortgage, legal expenses, a home inspection, and more.

Most lenders want to know you have enough money in savings to cover several months of mortgage, tax, and insurance payments on a home — as well as income to cover your monthly mortgage payment.

Lenders are generally required to verify the source of your closing and down-payment funds, including whether a portion of your down payment is a monetary gift from a family member, friend, employer, or nonprofit organization.