For a vast majority of Americans, buying a home will likely be their largest lifetime purchase.
A 2013 Gallup poll found that 56% of respondents already owned a home and planned to continue to do so, while another 25% did not own a home, but planned on buying a home at some point in the next 10 years. Comparatively, just 3% planned to sell their house and rent within 10 years, and 11% had no interest in buying a home. That's pretty overwhelming evidence that the American Dream lives on, even if homeownership rates today are at their lowest level (63%) in decades.
The importance of your credit score when buying a home
However, the home-buying process can vary drastically from one person to next, and I'm not just talking about the time spent looking for the perfect home. Your credit report and credit score can have a major bearing on how easy or difficult it is to obtain financing for a home loan.
Traditionally, the FICO scoring system is used, which ranges from a low of 300 to a high of 850. The higher your credit score, the more you'll have proved to prospective lenders that you're trustworthy and can repay your debts over time.
What's more, an excellent credit score means having more choices, which usually results in you getting the best possible mortgage rate and lowest mortgage origination fees. An excellent credit score means financial institutions being willing to fight for your business, and perhaps even shaving off costs in order to secure that business. Though the definition of "excellent" credit tends to vary by financial institution, NerdWallet interviews with mortgage industry experts last year tended to single out any credit score above 760 as "excellent." In simpler terms, an excellent credit score means you saving money.
So, what's the average credit score of the typical American homebuyer? According to ValuePenguin, the typical homebuyer has a credit score of 728, placing him or her firmly in the "good" credit category, and a full 30+ points ahead of the national average credit score of 695 (per ValuePenguin). Of the more than 85,000 mortgage applicants surveyed by the Federal Reserve, just 6.8% had credit scores below 620. It becomes increasingly difficult to secure a home loan with a credit score under 620, with most prospective homebuyers turning to a Federal Housing Administration loan as one of their only options with poor credit.
Based on this data, most homebuyers have a pretty good chance of securing a competitive mortgage rate and multiple offers from lenders should they choose to seek them.
Smart credit moves that can have a big impact on your credit score
But this doesn't mean America can't do better. An average credit score of 728 is pretty good, but it's still not excellent, meaning there are steps you can take to move your credit score from good to great in a relatively short period of time.
Arguably the most important factor to understand is your credit utilization rate. Most Americans are probably aware that paying your bills on time is important. According to CreditCards.com, your payment history accounts for about 35% of your credit score. However, what those same people may not realize is that your credit utilization (i.e., how much of your aggregate credit you're using, expressed as a percentage) accounts for about 30% of your credit score. Credit bureaus usually like to see individuals using less than 30% of their available credit. Any more and you're credit score is liable to take a hit.
Adjusting your credit utilization rate to less than 30% can be done in one of two ways. First (and ideally), you can pay down some of your debt to get below the 30% threshold. If this isn't an option, the second idea would be to consider asking your lenders to increase your credit limits. This may require a hard inquiry into your credit history that adversely impacts your credit score for a short period of time. However, new accounts and credit inquiries tend to do far less damage to your credit score than a high utilization rate. Increasing your credit limits can boost your aggregate credit available and lower your utilization rate, perhaps below 30%.
Another important move to make is to check your credit report annually at AnnualCreditReport.com. All three credit reporting bureaus offer a free credit report annually, yet according to TransUnion, a third of Americans had never checked their credit reports as of 2013. This is worrisome because errors can appear on your credit report that hurt your score across one or more of the reporting bureaus. Simply taking the time to review your credit report for inaccuracies at least once annually could help you catch an error, which would presumably boost your credit score once removed.
Finally, cardholders would probably benefit from not being so quick to close accounts if they're not using them much anymore. While cardholders might believe that closing rarely used accounts will demonstrate responsible credit use to the reporting bureaus, all it does is reduce your aggregate outstanding credit limit (thus boosting your utilization rate).
Furthermore, it cancels out your presumed good-standing payment history with that account, and probably lowers the average length of time your accounts have been open. These are all factors that can negatively impact your credit score. Your best bet remains keeping good-standing accounts open for a long period of time, as well as using them from time to time to ensure they aren't closed by the lender. Doing so should help improve a number of the factors that help determine your FICO score.
With just a little effort, time, and maneuvering, America's homebuyers could reasonably push their average credit scores to 760.
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