How to Fix Your Credit to Buy a House?
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The negative implication of having a low credit score is that lenders will view you as a high-risk borrower. Your loan options will be few and more expensive. It’s worthwhile to fix your credit to buy a house. You can enjoy huge cost savings on fixed-rate or variable mortgages.
This article goes into 12 different ways to fix credit. Learn what scores are needed to qualify for different types of home loans. Let’s get started:
What Credit Score Do You Need to Buy a House?
Let’s first look at the score ranges:
|FICO® Range||What It Means|
|Very poor||300 – 579|
|Fair||580 – 669|
|Good||670 – 749|
|Very good||750 – 800|
|Exceptional||800 – 850|
Traditional lenders such as banks require applicants to have FICO® scores of at least 670. The problem is that a huge chunk of the population may not qualify for conventional mortgage loans. About 34% of Americans have poor and fair credit. Fortunately, conventional loans are not the only path to homeownership.
Loans backed by the Federal Housing Administration only require borrowers to have scores of at least 500 or 580. If your score is at least 580, you pay a 3.5% down payment. But if you fall between 500 to 579, the down payment increases to 10%.
Veterans and service members can qualify for VA-backed loans. They come with less demanding credit requirements. Some lenders approve applicants with scores ranging from 580 to 620.
USDA loans, available to people purchasing properties in rural areas, have less stringent credit requirements. Automatic approvals are granted to people with scores of 640. Applicants with scores of up to 580 must undergo a manual approval process.
Repairing credit to buy a home becomes very important if your scores are below 600. FHA.com notes that some mortgage providers have been raising their FICO score requirements during the Covid-19 crisis. On the positive side, interest rates have remained very low.
How Your Credit Score Affects Mortgage Loans
Undertaking credit repair to buy a house can translate to thousands of dollars in savings and a smooth mortgage approval process. Borrowing with poor or fair credit introduces the following issues:
It reduces your borrowing limit
Two identical customers with the same incomes and same expenses will likely get qualified for different loan amounts if their scores are different. More creditworthy customers qualify for higher loan amounts. Lenders deemed them as more responsible. So, fixing credit to buy a home can mean closing on the house of your dreams that may be highly sought after by other buyers.
It increases your rates
Building credit to buy a house is investing in your future. You get to pay lower interest rates on all types of loans. Do you need a demonstration?
According to the myFico Loans Savings Calculator, you may save an extra $11,262 on a $100,000, 30-year fixed mortgage loan by improving your score range from 620- 639 to 640-659.
You can try out other scenarios with this handy calculator that uses rates offered by thousands of financial lenders.
You may pay a larger down payment
Subprime borrowers may have to fork out a larger down payment for conventional loans. Similarly, people with scores ranging between 500 – 579 also pay more in downpayment for FHA loans. Paying more upfront decreases the lender’s perceived risk.
It may necessitate mortgage insurance
If you choose an FHA-backed loan because of low credit scores, you pay the mortgage insurance upfront. It’s about 1.75% of the home’s purchase price. Prime borrowers can opt-out of mortgage loan insurance on conventional mortgages. They only need to pay a 20% down payment.
12 Tips to Improve Your Credit to Buy a House
Cleaning up credit to buy a house is not an immediate process. Dedicate about one to 12 months to get your scores where you need them to be. The higher you want to go, the more time it’s going to take. It’s easier to move from scores in the lower 500s to the 600s compared to moving to higher credit tiers with already good scores.
1. Ask for forgiveness for late payment entries
The first piece of advice entails cleaning up your payment history. Details such as how promptly you pay your monthly loan repayments give lenders a measure of your willingness to repay a debt.
If there are incidences of delinquencies or late payments, it may show a problematic credit history. The payment history also contributes up to 35% of the FICO® score and 40% of the VantageScore.
You can check if you have late payments by ordering a free credit report from annualcreditreport.com. It’s possible to ask for forgiveness for late payments. The strategy is usually successful with payments that are 30-days late.
Here is how to go about it:
- Contact the customer representatives;
- Ask to speak to someone in authority;
- Inquire about the possibility of having a late payment removed;
- Provide a good reason why you are late;
- Demonstrate that you have been a good customer;
- Explain why you need the item removed;
- Write a Goodwill intervention letter or email if it’s required.
2. Fix credit errors yourself
ConsumerReports, a nonprofit consumer advocacy group, estimated that about a third of all Americans have errors in their credit reports. In an article announcing their findings, they highlighted a case where a woman had a Paypal credit card account on her TransUnion credit report showing a $1,200 balance. Other bureaus showed that the account was fully paid off. This error would disqualify her from a lower interest rate at a local car dealership. She had tried to have the mistake resolved unsuccessfully before seeking the intervention of ConsumerReports.
If you’re looking for fast credit repair for a mortgage, resolving credit mistakes is a viable strategy as results may be seen in as little as 30 days. Fix your credit with these easy tips:
- Order your credit report;
- Check for mistakes such as duplicate accounts, missing information, and incorrect entries;
- Look for warning signs that your identity might have been stolen, such as strange accounts;
- Prepare a dispute letter following this sample letter from the Federal Trade Commission.
3. Work with a credit repair service to clean credit reports
When performing credit repair for mortgage approval, it will not hurt to seek the help of credit repair agencies. The companies assign case advisors to every customer. They will assist in reviewing credit reports and drafting dispute letters.
Repair services offer several extra services, such as helping customers ask for Goodwill removals and providing regular score updates. Most providers charge a monthly fee ranging from $50 to $150. Customers also pay an initial review fee that usually corresponds to their monthly package. Some of the best companies in this field include:
4. Pay down balances and stop racking up credit card debt
Scoring algorithms are all about assessing the borrower’s risk of defaulting on a loan. One way they try to do this is by looking at how much credit you are using vs. how much credit you have available. For instance, if your credit limit is $1,000, and you have a balance of $800, you have a credit utilization rate of 80%.
Anything over 30% is harmful to your scores. It may infer that you have an excessive appetite for credit and a problem managing it well. Consider reducing your credit utilization by following these pointers:
- Create a plan to reduce your credit card debt;
- Try debt payment techniques such as avalanche and snowball methods;
- Use debt payoff apps such as the I OWE YOU app;
- Avoid racking up more credit card debt leading up to the mortgage application.
5. Negotiate with a pay for delete letter
If you’re dealing with collection accounts, you may have a bit of a bargaining chip. Because debt collectors want their money, you can write a letter explaining that you’re willing to pay the amount provided that you get something in return. Most people ask to have their collections account removed from their credit report.
Now, this strategy does not have a high probability of working because information furnishers are required to maintain accurate records. However, you should try as it can significantly lead to an increase in your scores. Learn the proper way to write a pay-for-delete letter.
6. Don’t make common credit mistakes
You can make some common mistakes when finding the best way to build credit to buy a house. First things first, avoid loan applications that require a hard credit pull. Hard inquiries are derogatory items that stay on consumer reports for up to two years and affect scores for the first 12 months.
Don’t close old accounts such as credit cards. Keep them open even after paying down the balance as they contribute more points than newer accounts.
7. Deal with student loans
Student loans can be an obstacle in qualifying for mortgages. That’s because they contribute towards your debt-income ratio. You may also rack up late payment entries on your student loans. It’s essential to see if you can have them removed by sending a Goodwill letter and avoid further late entries.
The Federal government has made it easier for people with student debt to qualify for mortgages after the Biden Administration passed new FHA student loan guidelines targeting the calculation of monthly obligations.
8. Apply for credit building products
Applying for secured credit cards and personal loans may be a good strategy for building your credit before purchasing a house. For most secured cards, you need to make an initial deposit of $200. This amount also serves as your limit. Maintain a good history of credit use with the new credit accounts to offset the negative information that’s already on reports and qualify for better mortgage rates.
9. Add information about bill payments
If you’re great at paying your bills, you should consider adding information about your bill payments to your credit reports. It’s a viable way to improve credit to buy a house without opening new trade lines.
Paid services such as Level Credit and Rent Reports allow you to add information about rental payments to any credit reporting agency. Through Experian Boost, you can add different kinds of information for free, including utilities, phone, internet, and streaming services.
10. Become an authorized user on credit cards
Someone can add you as an authorized user on their credit card accounts. The card company will report their pattern of repayments to your account. Their available credit may also reduce your credit utilization rate.
You can start benefiting from this tactic in as little as 30 days. Approach a relative or friend with better scores and good card repayments patterns. Adding someone as an authorized user may be as simple as logging into the customer portal.
11. Keep debts from going into collections
When given a choice between paying off collection accounts and keeping accounts from becoming delinquent, focus on staying current on active accounts.
“Does this mean that I should not pay off or settle collections?” Well, there is more you should know. Clearing collections accounts may improve scores or not. It all depends on the scoring model the lender uses. If the mortgage company utilizes FICO® Score 10, it will not consider fully-paid and closed collection accounts. Most mortgage lenders still use FICO® Score 8 that factors paid or unpaid collections.
There is an extra motivation to improve credit to buy a house by clearing collection accounts. It’s hard to get approved for a mortgage with a collection account in your reports. Unpaid collections are a liability because debt collectors may sue customers and have their wages garnished.
12. Wait for certain negative items to age off
You can take a look at your credit reports to determine items that are coming up for deletion. Most negative items are removed after seven years, including late payments, charged-off accounts, settled accounts, and Chapter 13 bankruptcies. With Chapter 7 bankruptcies, they are deleted after 10 years.
So, how should you fix your credit to buy a house? In summary, start by reviewing reports for inaccuracies. Then, pay down debts on revolving credit cards. Try to have recent late payments removed. Clear the outstanding debt on collection accounts. Add positive information to your reports through bill payments or becoming an authorized user on another person’s card. You should also avoid common credit mistakes like closing old accounts or accumulating hard inquiries.