How to Build Credit to Buy a House

Lamine Zarrad
April 28, 2022
10 mins

If you’re like many folks, you may dream of owning your home. Among many benefits, home-ownership is a way to provide greater stability for your family and build generational wealth. 

Good credit makes it easier to get approved for a mortgage that meets your needs. But if you have poor or no credit, this doesn’t mean your dreams are out of reach. You just need to learn how to build credit to buy a house. 

The benefits of owning a home

Owning a home is a sizable investment and a long-term responsibility. But it also provides several important financial benefits. 

  • Stable Housing Costs: While rent prices fluctuate within markets, mortgage payments generally stay the same throughout the lifetime of your loan. 
  • Appreciating Investment: According to Black Knight, the 25-year average appreciation rate of homes in the U.S. is 3.9% per year.
  • Opportunity to Build Equity: Paying a mortgage builds equity, which you recover when you sell your house (on top of the appreciated value). 

Do you need good credit to buy a house?

While you don’t need perfect credit to buy a house, you’ll access better opportunities with a stronger score. That’s because your credit history plays a key role throughout the entire home-buying process. 

To begin the process, you’ll need to prequalify for a mortgage. A mortgage is an agreement between you and a lender that allows you to borrow money to buy a property. If you fail to repay, your mortgage agreement allows the lender to take the property. 

When you prequalify for a mortgage, you’re getting an estimate of how much a lender will borrow you. This figure is heavily influenced by information you provide about your finances – including your credit history. 

The better your credit, the better your chances of prequalifying for a mortgage that suits your needs. You’ll also receive better interest rates, which can save you major money over the lifetime of your loan. 

Buying a home is one of the largest financial decisions we can make. While you might be itching to pull the trigger, it’s smart to improve your credit before you take the plunge.

Here are a few common questions people have about how to build credit to buy a house.  

FAQs: Building credit to buy a house

Which credit score does a mortgage lender use?

Mortgage lenders will generally request a copy of your credit report from each of the three major credit bureaus (Equifax®, TransUnion®, and Experian®). They’ll also request a FICO® credit score based on each report. 

According to Experian®, the three most common FICO® score requests are:

  • FICO Score 2 or Experian/Fair Isaac Risk Model v2®
  • FICO Score 5 or Equifax Beacon 5®
  • FICO Score 4 or TransUnion FICO Risk Score 04®

Can applying for a mortgage hurt your credit?

Simply applying for a mortgage will not hurt your credit, even if you get denied. When a lender requests your credit history, however, a “hard” credit inquiry is added to your report. One or two hard inquiries will have a negligible impact, but more than five in a short time frame can harm your credit score.

Can you buy a home with no credit?

It’s possible to buy a home with no credit, but the requirements are strict and usually include a hefty down payment. As long as you can afford the initial costs and monthly mortgage, you may qualify for an FHA mortgage designed for first-time home buyers. While most lenders offer FHA loans, some have more credit restrictions than others.

Although it isn’t entirely true that you must establish credit in order to buy a house, you’ll access better offers with a higher score. That’s why it’s wise to build credit to buy a house before you apply for mortgages.

Learn more: How to Build Credit Fast (Even if You Have None)

What is the minimum credit score you need to buy a house?

As a rule of thumb, you’ll generally need a credit score of 620 to buy a house. This is the minimum score most lenders accept for conventional loans. But there are several different types of mortgage loans, and each has unique features and credit limitations. 

Learn More: What is the minimum credit score you need to buy a house 

Do mortgage lenders look at rental history?

Given how much Americans pay in rent each month, you’d think paying your rent responsibly would benefit your mortgage application. But since landlords don’t usually report positive account activity to the credit bureaus, this simply isn’t the case. Negative information, however, does show up on your credit report. This means past rent in collections can hurt your approval odds, but past rent payments won’t improve them. 

Fortunately, there are ways to build credit to buy a home and prove you’re a responsible renter. With Stellar, you can build credit using the bills you pay already, including your monthly rent. 

Can you buy a house while in debt?

It’s possible to buy a house while carrying debt. Depending on the type of debt and how much you owe, however, it may be harder to get approved. Since high interest rates on credit cards can quickly spiral out of control, lenders like to see a low debt-to-income ratio and credit utilization.

It’s smart to pay down your debt before applying for a mortgage. But the average US household owes about $6,849 on credit cards. If buying a house with credit card debt wasn’t possible, very few people would own homes. 

Can you take over house payments with no credit check?

A new buyer can take over an existing home loan if a mortgage agreement allows an “assumption.” Assumptions are not common and lenders will almost always run a credit check. If you don’t qualify for the existing mortgage, you won’t be able to take over the payments. 

Pro Tips: How to build credit to buy a house

It’s possible to buy a home with poor or no credit, but it is substantially more challenging. That’s why we recommend learning how to build credit to buy a house before you start the hunt. 

Fixing your credit score to buy a house

The best tip for buying a house with bad credit? Improve your credit score. Taking steps to fix your credit makes you more appealing to lenders, which improves your approval odds and the ultimate terms of your mortgage. 

Factors that affect your credit score 

Each credit bureau uses slightly different scoring methods, but there are five main factors that affect your credit score: payment history; amounts owed; credit age; credit mix; and new credit. 

  • Payment History: This accounts for around 35% of your FICO score, and considers whether or not you pay your bills responsibly and on time. 
  • Amounts Owed: Credit utilization accounts for about 30% of your FICO score. Lenders prefer to see you’ve extended 30% or less of your total credit limit. 
  • Credit Age: Your credit age considers the length you’ve held your oldest and newest accounts, and average age across all open accounts. It accounts for about 15% of your FICO score.
  • Credit Mix: Impacting around 10% of your FICO score, credit mix shows you can responsibly manage different types of credit – like revolving loans and credit cards. 
  • New Credit: Recently opened accounts and hard inquiries give lenders insight into your immediate financial situation. This accounts for about 10% of your FICO score.

How to pay debt while saving money

One of the best ways to build credit to buy a house is to pay down your debts. It’s also important to save money for a down payment. Take steps to reign in your spending and learn how to budget and save to improve your financial situation and make the home-buying process less stressful. 

Does renting an apartment build credit?

The average American pays over 30% of their income in rent. While it’s one of our most substantial monthly expenses, rental payments usually don’t build credit. That’s because most landlords don’t report positive account activity to the credit bureaus. 

Fortunately, there’s a new way to use bills like rent to build credit. With Stellar, you can link your monthly expenses to build a positive credit history and improve your score. 

A powerful tool for building credit to buy a house

Home-ownership is part of the American dream, but you may have trouble getting approved for a mortgage with poor credit. While secured cards can help with credit to buy a house, they require a hefty deposit and have high interest rates. This means less money in your savings account for a down payment. 

With StellarFi, you can build credit without a secured card. Signing up is easy, and there’s no credit check. Simply link the bills you pay each month already (including your rent!) and start building a positive payment history.

Ready for Stellar credit?

The StellarFi blog is intended to serve as an informational resource. While StellarFi can help you build your credit, we do not provide financial, legal, or accounting advice. Please consult a trusted advisor for financial, legal, or accounting guidance as needed.

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On-time payment history can have a positive impact on your credit score. Nonpayment may negatively impact your credit score. StellarFinance, Inc. will report your on-time payments to Experian®, Equifax® and TransUnion®. Impact on your credit may vary, as credit scores are independently determined by credit bureaus based on a number of factors including the financial decisions you make with other financial services organizations.