How to Fix my Credit to Buy a House

Are you dreaming about buying a house but need some advice to help you fix your credit to do so? You have come to the right place.

Buying your first house is a proud and exciting moment for anyone but securing a home loan is not exactly a walk in the park, especially for those who have a less than perfect credit record.

In this article, we’ll take a closer look at what is required to secure a home loan and what steps you can take to improve your credit record as quickly as possible so you can afford to buy your dream home.

What is a Credit Score?

Your credit score is a value assigned to your name, which lets potential lenders and credit facilities know how responsible you are regarding the payment of any debt you might owe.

The following factors will be considered when calculating your credit score:

  1. Whether or not you have made regular payments toward your lines of credit: 35% of your score.
  2. The value of the debt you currently have: 30% of your score.
  3. How many years you have had credit for: 15% of your score.
  4. The number of lines of credit you currently have open: 10% of your score.
  5. Recent credit activity (purchases and payments): 10% of your score.

To obtain a good credit score, you should not create more debt than you can afford to repay, and you should make payment on the debt you owe regularly.

Credit scores can range from 850, which is considered the highest score possible, to 300 at the bottom of the scale.

In the US, you can approach either of the three major credit reporting agencies, Equifax®, Experian®, or TransUnion®, to find out what your credit score is. 

What Credit Score Do I Need to Buy a House?

Once you know what your credit score is, you will be in a better position to determine whether or not you qualify for a home loan.

Individuals who have a credit score of 760 and above, which is considered a good credit score, would be offered the most competitive home loans and rates, as they would be less of a risk to lenders.

To qualify for a normal home loan, you would need to have obtained a credit score of at least 620. However, should your credit score fall below the 620 mark, there may still be another option for you.

What Is a Federal Housing Administration (FHA) Loan?

If you find that your credit score is below 620 and, as a result, you don’t qualify for a typical mortgage, you may still qualify for a Federal House Administration (FHA) loan.

An FHA loan is a type of mortgage facilitated by an FHA-approved lender and underwritten by the Federal Housing Administration. This type of mortgage is tailored for individuals who fall within the low-to-moderate-income bracket and cannot afford to buy a house the conventional way.

The FHA makes provision for people with lower credit scores to become homeowners and affords them certain benefits, such as a smaller down-payment and lower interest rates. 

To qualify for an FHA mortgage, however, you must meet certain criteria regarding income, and you must generally have a credit score of 580 and above. 

If you meet all the necessary criteria, the FHA could provide you with a mortgage for 96,5% of the value of the property you wish to purchase. This means that you will need to pay a 3,5% down payment for the house.

You may still be able to secure a home loan, should your credit score lie between 500 and 579, but if you do, you will need to pay a deposit of at least 10% to qualify. 

It is easy to understand why FHA loans are a popular option for first-time buyers.

How Do I Fix my Credit to Buy a House?

What happens, though, if your credit score currently falls below the minimum required 500?

Should this be the case, you will need to put some work in to build up your credit record and be considered for a mortgage loan by either the FHA or a traditional lender, such as the bank. 

But don’t worry. All is not lost. We’ve put together a list of things to do to get your credit score into the green zone as quickly as possible:

  1. First, it’s important to determine if the credit reporting agency you received your credit score from has all of its ducks in a row. In other words, review your credit report thoroughly and make sure that all of the information detailed in the report is accurate.
  2. According to Saver Life, if you find any errors within your credit report, you must approach the agency to dispute their findings and rectify the information to get a true reflection of your credit score.
  3. If resolving your current debt feels like an overwhelming task for you at this time, it may be helpful to seek advice from a credit repair service. They will sit down with you, go through your monthly expenses and existing debt, and will work out a way for you to pay off your debt in the most manageable way possible.
  4. To keep your outstanding debt to a minimum, BadCredit.org recommends that you do not open any new accounts or make any purchases against your existing accounts or credit card. Accumulating more debt is going to make it harder for you to pay everything off, so it is best to try and make do with what you have while paying something towards the debt you have accrued.
  5. Similarly, you shouldn’t close any accounts at this time. Keeping the account open and paying off your debt will help in fixing your credit score.
  6. Once you are clear on how much you need to pay each month to reduce your debt, you need to ensure that you make payment consistently, on time, as agreed.
  7. The amount of time it takes to fix a credit score differs from country to country, however, in the US you will need to maintain regular payments on time for a minimum of six months to improve your overall score. As your payment history counts for 35% of your credit score, a history of six months of regular payments will go a long way to improving the score.
  8. Bear in mind that developing a good credit history through regular payments can offset your bad payment history and bring you closer to getting that home loan. 

After six months, go back to the credit reporting agency and request rescoring to determine where your credit score stands. You may still have some work to you, but you should at least see an improvement and your score should have increased over this time.

It may be worth your while to approach all three of the credit reporting agencies to request a report, as the data stored by each can vary, which could affect your overall score.

Once your credit score is above the 500 mark, you should be in a position to begin discussing the option of applying for an FHA loan. But remember that with a credit score this low any loan you receive would be considered high risk. You must, therefore, be prepared to pay a larger deposit lump sum upfront and will likely incur a high-interest rate than normal.

Following the above simple steps, however, will put you on the path to fixing your credit so you can buy the house you have been longing to buy.