How to Fix My Credit to Buy a House
By Erik J Martin MAY 10, 2022
How to Fix My Credit to Buy a House | Ownerly
Your credit score might be the most important number you need to buy a house. Find out how to fix your credit to get the best mortgage possible.
You’re excited about the prospect of applying for a mortgage and purchasing a home. But there’s one possible number that could hurt your chances: a low credit score. Your credit score might be the most important number you need to buy a house, causing you to wonder, how to fix my credit to buy a house?
The good news is you can take steps to improve your credit score before applying for a mortgage loan. Learn what the experts advise, the minimum and recommended credit scores you should aim for and how you may still be able to get home financing with a bad credit score.
Fixing credit to buy a house 101
If you have a less-than-desirable credit score, don’t panic. According to experts, you can take the following steps to try to improve your score and fix your credit, making you a more attractive borrower candidate.
Pay off your balance every month
Don’t just make the minimum required payment—pay your credit card balance and any other financing bills in full every month whenever possible.
Pay down outstanding debt
“The more available credit you have versus debt you are carrying, the better your score,” said Andrea Woroch, a money-saving expert in Bakersfield, California. “That’s why it’s important to pay down any debts, focusing first on high-interest debt charged by credit cards.”
Check your three credit reports
Visit annualcreditreport.com and access your Experian, Equifax and TransUnion credit reports for free. Review all details and accounts for accuracy. If you notice any errors, resolve them as soon as you can.
Transfer your balance to a new credit card
Consider transferring your current credit card debt to a different card offering 0% interest on balance transfers.
“This will ensure your payments go further in reducing your principal balance each month and give you more available credit when you move that balance,” Woroch said. “Just make sure you don’t rack up new purchases on the original credit card and don’t close the account, either.”
Become an authorized user
Having a trusted family member or friend to add you as an authorized user on their credit card account could also help. Here, you’ll be added as a secondary account holder not responsible for paying the bill, Woroch said, “but you will benefit from the primary account holder’s account status, which will be reported on your credit file. As long as this person pays the bill on time and in full, you will see improvement to your credit score.”
Request a higher credit card limit
If your credit limit increases but your average monthly balance remains the same, your overall credit utilization, which is the amount of credit you are using, will be lower. If you have a high credit utilization percentage, or you’ve maxed out your cards, you will have a high credit utilization, which can reflect negatively on your credit. If you have more credit available to you than you owe, your credit utilization will go down, enhancing your credit.
Refrain from opening new or canceling old credit cards
Opening new credit accounts or canceling old cards can ding your credit. Note your credit score can improve if you hold a credit card for a longer length of time.
Cut monthly bills to boost savings and debt repayment
Think about how your spending habits and monthly expenses affect your credit improvement goal. If you survive paycheck to paycheck and find it difficult to decrease your credit card debt, you may want to reevaluate your bills and look for saving opportunities.
“For example, cancel unused subscriptions, cook at home, negotiate your cable package and get new quotes for more affordable auto and homeowners insurance,” said Woroch.
Avoid large purchases before applying for a mortgage loan
“The weeks and months before applying for a mortgage are not the time to purchase a brand-new car,” said Nik Shah, the CEO of Home.LLC in San Francisco. “Large purchases typically require a hard credit score check, which can lower your credit score by several points and require you to take on more debt.”
Also, avoid maxing out the credit limit on your credit card or credit line.
Don’t formally apply for a mortgage loan until you are ready
“A formal mortgage application will lower your credit score by a few points,” said Shah. “Do not send in the full application until you are ready to commit.”
What is your credit score?
Experts say there are many criteria that mortgage lenders evaluate when considering a borrower applicant for a mortgage loan. These include your earnings, employment history, savings and credit history. But possibly the most important determinant of your creditworthiness is your FICO credit score , represented as a three-digit number.
“Your Fair Isaac Corporation, or FICO, score rates your credit so that lenders can determine the likelihood of you repaying a loan,” said Shah. “A high credit score rewards someone who has a history of borrowing money responsibly and paying it off on time. A low credit score may indicate that you have never used credit before or have used credit irresponsibly.”
Among the factors that may determine your credit score:
- Your history of bill payments.
- The number of loan/financial accounts you currently have open and for how long.
- The percentage of available credit you are using.
- Any new/recent applications for credit or loans.
- Any current unpaid debt and records from collection agencies, foreclosures and bankruptcy.
What credit score do you need to buy a house?
FICO scores can range from as low as 300 to as high as 850. The higher your credit score, the better your chances of getting an attractive loan deal at a low interest rate, experts say. The lower your credit score, the more you’ll pay in total for a loan over its lifetime and the higher likelihood of being denied a loan entirely.
You typically need a minimum credit score to obtain a mortgage loan, although this minimum will depend on the type of loan you are applying for.
“Minimum credit scores for FHA loans, VA home loans and USDA home loans average around 580,” said Ralph DiBugnara, the president of New York-based Home Qualified. “The actual guidelines for these loans say there are no specific FICO score requirements. Still, almost all lenders will require a minimum credit score. For conventional loans through Fannie Mae or Freddie Mac, you need a score of at least 620.”
However, striving for higher than the minimum credit score may improve the likelihood of getting approved for a loan and paying less interest.
“A credit score of 720 or higher is considered safe and will get you better home loan rates,” said Dan Belcher, a real estate broker and CEO of Mortgage Relief in Oklahoma City.
Your credit score can impact the interest rate a lender will offer as well as the total interest you will pay over the life of a loan.
You might be able to access your credit score for no charge through your credit card or bank. Capital One, American Express, Chase, U.S. Bank and other financial institutions have permitted their members to retrieve free credit scores. Alternatively, you can pay a fee to get your credit score via different services online.
Can a credit repair service help you get a mortgage?
Another technique to improve your credit score is to enlist a credit repair service.
“These third-party companies can help consumers remove inaccurate, older, negative information or unverifiable information from their three credit reports,” said Matthew Locke, the Kansas City-based national mortgage sales manager for UMB Bank.
The caveat? You’ll have to pay a fee, which usually ranges from $69 to $149 or more, and the process often takes several months, according to Belcher.
If you have particularly problematic credit reports, hiring a credit repair service may be worthwhile. But you can usually resolve minor errors and inaccuracies spotted there without professional help.
Can you buy a house or get a mortgage with a bad credit score?
Fortunately, you don’t need an exemplary credit score to qualify for many mortgage loans .
“A credit score of 620 will get an applicant access to almost all loan programs, although usually at a higher interest rate,” said DiBugnara.
You can even have a score as low as 500 to qualify for an FHA loan, although you’ll be required to put down a larger down payment at 10% versus as low as 3.5% down if you have a 580 credit score.
The bottom line
Making efforts now to raise your credit score—well ahead of your timeline to apply for a mortgage loan—is strongly recommended and worth your time.
“Remember that your mortgage loan rate is priced based on your credit score,” Locke said. “A lower score can raise your interest rate significantly, which means you could be paying a higher rate for the life of the loan. If your score is too low , it could be in your best interest to postpone applying for a loan and shopping for a home until your score improves.”