Have you wanted to buy a house for you and your family to call home, but your credit score keeps getting in the way? If the answer to that question is yes, then keep reading.
The process of buying a home can be daunting. Your credit score determines what type of home mortgage loan you can receive, and it also helps determine what your monthly mortgage payments will be for your home.
The key to your credit score is your debt and your relationship with it. If you have significant amounts of debt that continue to rack up monthly bills that you cannot pay on time or pay at all, your credit score will suffer.
This will then cause your loan options to become very limited, and your mortgage payment amounts to increase due to the interest rates on the loan.
Let’s break this all down for you to make it easier to understand what you need to do to fix your credit to buy a house.
What is a Credit Score?
A credit score is essentially the sum of a mathematical formula or equation that is used by the three credit bureaus Experian, Equifax, and TransUnion, to predict whether or not you are likely to pay back a loan that you have on time.
If you’ve taken out multiple credit cards with your bank or have a couple of car loans and you don’t make consistent payments on those debts, your credit score will suffer.
Your bad payment history with these credit cards, car loans, student loans, etc. are used to generate your low credit score that will show mortgage lenders that you are someone they shouldn’t trust their money with for a home mortgage loan.
Factors That Impact Your FICO Score
Several factors are used by the three credit bureau’s to determine your personal credit score:
Your payment history. As explained above, bad payment history is when you have a bad habit of not paying your credit cards and other loans consistently and on time.
Any unpaid debt that you still have. Your credit score considers how much current outstanding debt you still have. This is reflected in your credit score that can alert a potential lender that you might have too much debt, and it would be unwise of them to do business with you because of the large amount of debt you still are paying off. Or it can show them you don’t have much debt and can handle a loan.
How many loans you currently have, and what type of loans they are. This is another important factor and goes hand in hand with the previous factor. If you have too many open loans with various amounts of debt, your credit score will reflect that.
The amount of credit you use is based on what you have available to use. An example of this would be, you have a credit limit of $5000 on your credit card, and you consistently use 80-90% of the total $5000.
If you’ve ever had debts that have been sent to a collections agency or resulted in foreclosure or bankruptcy. When you continually skip your monthly credit payments, they get sent to collections agencies that hound you with phone calls and letters until you pay the debt.
Foreclosures happen when you are unable to or have skipped multiple loan payments on a property, the lender will take back the ownership of the property to try recovering some of their owed money. Bankruptcy is meant to help people get rid of all of the debt and get a fresh start financially. It is a legal process that eliminates your debt at the expense of potentially losing all of your assets to pay off the debt and makes it difficult to open any new loans or credit accounts for up to a decade.
6 Ways to Fix Your Credit Score
1. Get a Copy of Your Credit Report. The first thing you need to do to fix your credit score is to get a copy of your credit report. This very important report has all the information you need about your credit activity, including any open credit accounts and any public records against your credit.
You can get a free credit report from all 3 bureaus by visiting AnnualCreditReport.com. AnnualCreditReport is a great place to start and is sponsored by the major credit bureaus so you can rest assured this free service is not a scam. By having your credit report, you can begin to work out a plan by knowing exactly what credit accounts you have, how much credit you have, and how much debt you owe them.
2. Pay your bills on time. The second step, start paying your bills on time, even if you can only make the minimum monthly payments. If you need to hang up a physical calendar with all of your bill’s due dates written out as a daily reminder, do it. Late payments, even if it’s only one missed payment, can hurt your score significantly and are a major reason why someone would have lower credit scores.
In addition to this easy enough strategy, take some time to find out if any of your monthly bills can be set up as automatic withdrawals that you can set for exact dates every month, so you never have to worry about forgetting the due date again.
Or combine both of these ideas, set up automatic withdrawals for all the bills that you can do this with, and then put their due dates in your calendar with reminder alerts so that you are never blindsided by your bills ever again.
3. Pay down debt. This one is easier said than done sometimes because it means having to reorient parts of your financial life in order to achieve it. If you want to pay down outstanding debts and pay it down faster, you will have to create budgets, cut things out like those weekly fast-food dinners.
4. Dispute Errors. Now that you have your credit report and you are learning to better handle your money and where it goes every month, dispute everything that appears to be a financial error. If you know that you already paid a certain credit bill, utility bill, whatever it is, you have them calling you to say that they never received your payment and will soon be forwarding it to a collections agency, dispute it.
Make sure that you have digital or physical copies (or both) of the payment confirmation letters to prove to them that you did indeed pay that bill.
If, on the other hand, you need to remove a dispute to demonstrate a clean credit report, make sure you contact the creditor or credit bureau to have it removed.
5. Low Credit Utilization. Learn how to control and utilize your credit. Otherwise, it will control you. Meaning, that if you have a credit line of $5000, only ever use and utilize up to 30% at all times. Focus on keeping your credit card paid off every month, but if that isn’t possible, try to keep the credit utilization ratio below 30%. So, on a credit line of $5000, never let it go above $1500.
6. Find a Credit Counseling Agency. Putting it simply, a credit repair agency is an organization that is capable of educating and advising you on how to create effective budgets, money management, and other free educational workshops geared towards improving your financial health. Companies such as Credit Saint and Lexington Law have worked with thousands of clients and have improved their poor credit scores and delivered higher scores based on their methods of working with the different credit agencies.
What Should Your Credit Score be for a Home Loan?
Your credit score is a number that will fall somewhere between the range of 300-850. Once again, it is a number that is determined by the credit bureau’s mathematical formula that factors in everything discussed earlier in this article.
If you’ve been following all of the steps laid out above, then you are well on your way to improving and increasing your credit score in order to be eligible for a home loan and an affordable monthly mortgage.
Before submitting a home loan application, it’s a good idea to work toward a higher credit score so that it sits in the range of 620 or higher. The best way to do this keeping up with your monthly bills such as your credit card payments (Pay the minimum payments if you can’t pay all of it off), auto loan payment, personal loans and any other conventional loans you may have.
While it is highly suggested that your credit score be at least 620 to be eligible for a home loan that doesn’t have ridiculous interest rates, there are loans like an FHA loan that usually only require a credit score of 580 to be considered eligible with a lower interest rate.
Another option is looking at VA loans. If you served in the military, you may be eligible for a VA loan with a minimum score of 600. That said, you will need to meet certain financial requirements such as a larger down payment and may be subjected to a higher interest rate.
Wrapping It Up
The road and process to buying and owning a home can be difficult if you have bad credit. The good news is that bad credit is fixable and there are many resources available to you to accomplish this.
Your credit report will be the foundation of your game plan to a better credit score. Without it, it will be hard to determine the status of your debts and credits and how badly it’s affecting your chances at a home loan and an affordable mortgage payment.
The next step of actually improving your credit score may be a long run, depending on how bad your credit score currently is. If you need to, find a credit counseling agency that can educate and train you on how to create realistic budgets, methods, and strategies that allow you to pay down debt while still leaving you with some breathing room.
Once you’ve done everything you need to do and you’ve successfully improved your score to the suggested minimum credit score of 620 or higher range, congratulate yourself for a job well done. Then after you’ve done that, go use your good credit score to apply for a home loan from a financial institution that will be likely to be approve you with an affordable mortgage payment and get that new home!