Mortgage interest rates are still very low, even though they started to rise last year. Between low rates and rising home prices, many Americans want to buy their first house.
But for too many, a low credit score is holding them back. Although there are more home mortgage options today for people with lower scores, there is no doubt that a high credit score makes it easier and cheaper to buy a home. It is possible to buy your first home with a bad credit mortgage loan, but you don’t have to if you make an effort to restore your credit prior to making an offer.
You May Qualify for a Lower Mortgage Rate by Rebuilding Your Credit Scores Prior to Buying a House
Potential home buyers who want to boost their FICO scores should heed these simple tips:
1. Check Your Credit Report
Getting your credit in order will require you to check your credit report. You need to see what the strengths and weaknesses are of your report. Also, you should double check that there are not mistakes. Sometimes negative items could be reported more than once.
It also is important to verify that nothing has been reported late in error. Also, make certain that the amounts owed on open accounts is right. If you find any mistakes, you should dispute them with the relevant credit bureau. Each of the major credit bureaus has a contact address specifically for disputed items. They are required by law to investigate anything that you dispute in a timely manner. The bureau will research the item in question and will send you a mailed response.
2. Set Payment Reminders
It is very easy to miss payments on credit cards and other credit lines. The due dates are often different, and who does not get busy and forget to pay a bill on time? The problem is that if you pay late, not only will you pay a late fee; once the bill is 30 days late, it goes onto your credit report. So, you should set up payment reminders on your computer or mobile device to ensure every credit line is paid on time.
3. Cut Down Debt
Nothing will make your score go up faster than paying off a credit card or two. If you knock $5000 off your balance, your credit utilization score will drop and this will increase your score by 20 points or even more. If you want to buy a house soon, getting rid of credit card debt is one of the most important things to do. You should only use credit cards for purchases that you can pay off each month, or at worst, in a couple of months. Once you get your credit line utilization under about 1/3 of your maximum credit line, you will really see an improvement in your credit score.
4. Pay Bills on Time
You should always pay all credit card and other bills on time. Collections will knock a lot off your credit score. Take careful note of when each bill is due and always pay it by the due date. If you do miss a due date, you will probably need to pay a late fee, but you should be okay until that bill is more than 30 days late. Still, it is best to never be late on a bill at all.
5. Collections Hang Around
Even if you pay off a collection, it will stay on your credit report for seven years. So, you are best off by never having collections on your report at all. If you have any very late payments, it is a good idea to contact the creditor before they pass it off to collections. You may be able to work out a repayment plan and avoid this nasty black mark on your report.
6. Pay Off Your Debts
Many people like to move credit card balances around from one low interest card to another. This may help to save you some interest each month. But you still need to get your credit utilization percentage down as low as you can before you apply for a mortgage. In many cases, the interest rates will higher on home loans for people with bad credit, so paying down your revolving debt could help you qualify for more affordable home financing.
7. Don’t Open New Accounts
When you are applying for a mortgage or in the underwriting process, it is not a good idea to be opening a bunch of new credit lines. Each credit score inquiry will lower your score. And underwriters will wonder why you are trying to get a lot of new credit. You want to have as stable a credit profile as possible when apply for a mortgage. Do not open any new accounts until the loan has closed and funded. Even after it is approved, the mortgage lender will still pull your credit again before the loan closes.
8. Don’t Close Old Credit Card Accounts
It is a myth that open credit lines that are unused hurt your score. In fact, closing them can hurt! The longer your credit history, the higher your score. So, closing a 10-year-old credit card account that you do not use can hurt you.
9. Reestablish Credit
Did you have a foreclosure or bankruptcy? Don’t worry. You can still get a mortgage; the waiting period generally is two or three years. But it’s another myth that you must wait seven or 10 years after these negative events to get a mortgage as a first time home-buyer.
Yes, Buying a home with bad credit is a possibility in today’s financial climate, but why pay more monthly for a mortgage if you can take a few simple steps to raise your credit scores to ensure more affordable housing. The important thing after a major derogatory credit event is to reestablish credit ASAP. There are credit cards out there that will give you a credit card with a low $500 credit line. It’s not much, but that card can be enough to help you get your credit established again. Also, get a small car loan if you need a car, as paying on a regular installment loan will raise your score.
The Takeaway on Improving Credit Scores
These secrets above will help you to raise your score quickly so that you can get a home loan. Give them a try a year or so before you are going to apply for a mortgage, and your odds of being approved will rise. Even if your credit is so-so, you still may get a loan, but a higher credit score will help your interest rate.
- How to Improve My Credit Score. (n.d.). Retrieved from http://www.myfico.com/credit-education/improve-your-credit-score/