Looking to buy in today's turbulent market? Here's the 1 simple thing you can do ASAP to improve your odds and save yourself thousands

Given how much hinges on your credit score when buying a home, there’s one simple thing you can do right now to increase your odds of finding the right home, while also potentially saving yourself thousands.

The perks of a good credit score

One simple thing you can do ASAP to improve your odds of buying a home in today’s turbulent market is to boost your credit score. Here’s why.

An analysis by online real estate database Zillow [1] found that “improving your credit score from the lowest range to the highest could increase the number of homes you could afford in the nation’s top 50 markets by an average of 10%.”

Here’s an example of a typical U.S. home purchase that costs $369,147 with a 20% down payment.

Credit Score: 780 to 850

• Mortgage rate: 6.69%
• Required income: $99,145
• Closing costs $4,045
• Monthly payment: $1,903

Credit score: 620 to 639

• Mortgage rate: 7.29%
• Required income: $103,843
• Closing costs: $5,522
• Monthly payment: $2,022

That’s a difference of $119 per month, or $1,428 a year, between the top and bottom credit tiers. Not to mention $1,477 in extra upfront costs at closing for the lower-score buyer.

The buyer with the higher credit score spends less of their monthly payment on interest, leaving more room to afford a larger home or to keep more cash in their pocket. Over the life of a 30-year mortgage, even that $119 monthly difference adds up to more than $42,000 in savings. And because lenders see higher-score borrowers as less risky, they not only qualify for lower rates but also face reduced fees at closing.

The result: two buyers with the same income and down payment can end up in very different situations. One can comfortably qualify for a $369,000 home with lower monthly payments and fewer upfront costs, while the other has to stretch their budget, pay more over time and may qualify for fewer listings.

Zillow senior economist Kara Ng says, “The more you increase your score, the more you’ll see lower closing costs, better mortgage rates and more choice of unique lenders” [2].

She said that now is the time for buyers to “get your credit score in shape” since the U.S. housing market “continues to become more balanced for buyers.” That doesn’t mean homes are cheap or easy to get, but refers to supply-and-demand dynamics: more listings are on the market than at any time since late 2019. In other words, buyers with strong credit have more leverage today than they did at the peak of the pandemic housing frenzy.

How to improve your credit score

Your credit score is made up of several factors, each weighted differently in FICO’s formula [3], one of the major credit score companies.

• Payment history (35%): whether you pay your bills on time
• Amounts owed (30%): how much debt you’re carrying compared to your available credit
• Length of credit history (15%): how long you’ve had credit accounts open
• Credit mix (10%): the variety of credit types you have (loans, credit cards, etc.)
• New credit (10%): how many recent applications or new accounts you’ve opened

Understanding this, you can begin to tackle individual factors.

There are three national credit bureaus in the U.S: Equifax, Experian and TransUnion. You can start by pulling reports from all three credit bureaus to compare them side by side.

Federal law allows you to get a free copy of your credit report every 12 months from each credit bureau. If you spot any errors, you can dispute them in writing, first with the credit bureau in question and then with the company that reported it (which could be a bank, landlord or credit card company).

The Consumer Financial Protection Bureau (CFPB) provides detailed information on how to do this.

To start improving your credit score, the CFPB suggests that you pay all your bills on time, every time since this is the number one factor for most credit scoring formulas.

Ideally, you’ll pay off your balances in full each month. If you’re going to carry a balance, it’s best to keep your balance to no more than 30% of your limit; it may be better to have small balances on several cards than to max out one.

Also, since a long credit history may help your score, you may want to keep existing credit cards or lines of credit open, even if you don’t use them.

However, if you’re applying for more credit, too many applications could hurt your score. So you may want to mix it up — say, by opening a line of credit instead of another credit card.

It’s worth noting that it’s not necessary to have a credit score to get a mortgage. If you don’t have one, there are several ways you may still be able to get a mortgage, including manual underwriting [4].