2 Downsides of Not Repairing Your Credit Before Buying a Home

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Buying a home has many unglamorous parts that you never see on HGTV. Those attractive people with a suspiciously high budget you see on House Hunters aren't shown making on-time bill payments, working overtime to pay off debt, or hunting for errors in their credit reports. But these moves are all excellent ways to get your credit in good shape before applying for a mortgage.

Keep reading to learn why it's worth digging into your credit and improving it as much as you can before trying to buy a home.

1. You won't have as many lender options

With a higher credit score, you'll have the chance to work with nearly any lender you want -- borrowers like you are what mortgage lenders dream of. A solid credit history shows a lender you're a lower risk and can be counted upon to make your payments on time and eventually pay off your home loan.

If your credit score is on the lower side, however, you may struggle to find a lender that is offering competitive rates for a borrower like you (more on rates below). It might be a good idea to target the best FHA lenders in your search.

FHA loans are a good option for people whose credit scores are on the lower side -- you can buy with a 500 credit score if you can make a 10% down payment. But they are likely to be more expensive than other loan types due to the mortgage insurance requirement. On an FHA loan with less than 10% down, you'll pay an upfront mortgage insurance premium (MIP), as well as an additional payment every month for the life of the loan.

2. You'll pay more in interest

Ultimately, getting a home loan of any kind with a lower credit score and more black marks on your credit history is likely to result in paying more for that loan. There's often a stark difference between the rate you'll be offered with a credit score of, say, 620 (commonly regarded to be the minimum score for a conventional loan) vs. a credit score of 800.

FICO maintains a mortgage calculator that uses a consumer's FICO® Score -- this is the credit score most commonly used by lenders of all kinds. As of this writing, a credit score of 800 might entitle you to a mortgage rate of 6.567% -- on a 30-year home loan totaling $250,000, that'll come in with a monthly payment (principal and interest) of $1,591.

But if your credit score is 620, your rate could be 8.156% -- giving you a monthly payment of $1,862. Over the 30-year term, you'll pay an extra $97,369 in interest thanks to this higher rate. No matter how you slice it, having a higher credit score will save you money on a home purchase.

How can you avoid these fates?

I hope I've proven the case that repairing your credit before attempting to become a homeowner is your best bet. But how do you do that? Consider making these moves:

• Check your credit score: Some credit card companies and banks offer free access to your FICO® Score, and since this is the one used by most lenders, checking yours out is a good window into what a mortgage lender will see.
• Get your credit report, too: You can get your credit report for free at AnnualCreditReport.com. Is the information on it accurate? If you spot any errors, you can have the credit bureau remove them, which should help boost your score.
• Pay down existing debt: This is a fast way to improve your credit score ahead of applying for a mortgage, but isn't feasible for everyone. If you can pay off a chunk of existing debt (especially of the high-interest variety, like that on a credit card), it'll improve your credit utilization ratio.
• Keep making on-time payments: Payment history is the most significant piece of your credit score, so ideally this is something you're already doing. If not, put a special focus on it now. A history of on-time payments shows a lender you're a responsible borrower.

If buying a home is in your future, take the time to dig into your credit profile and improve it before applying with a lender. Otherwise, you'll be making the process harder and more expensive.

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