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The Frugal Creditnista

How to Fix Your Credit to Buy a Home

Are you dreaming of buying a home but feeling held back by your credit score? You're not alone. Many people find themselves in this situation, but the good news is that there are steps you can take to improve your credit and get one step closer to homeownership.

 In this article, we'll cover everything you need to know about fixing your credit to buy a home.

Understanding Your Credit Score

Before we dive into the specific steps you can take to improve your credit, it's important to understand what your credit score is and how it's calculated. 

Your credit score is a 3-digit number that represents the risk of doing business with you. If your scores are lower, this indicates to lenders that you are a higher risk; you’ll experience denials and/or higher interest rates. The higher your scores are, the lower your interest rates will be and the better terms and credit options will be available to you. 

Your credit is calculated based on several factors, including your payment history, credit utilization, length of credit history, and types of credit.

The most commonly used credit score for mortgages is the FICO credit score, which typically ranges from 300 to 850. 

Minimum Credit Score Requirements

Credit score requirements for purchasing a home will vary by lender and loan type.

Most conventional loans require a credit score of at least 620. However, some lenders may require a higher score, especially if you're applying for a jumbo loan or if you have a high debt-to-income ratio.

FHA loans, which are backed by the Federal Housing Administration, are a popular option for first-time homebuyers and those with lower credit scores. The minimum credit score requirement for an FHA loan is 500 and requires a 10% down payment; to qualify for the 3.5% down payment option, you'll need a score of at least 580.

For USDA loans, which are government-backed loans for low to moderate-income homebuyers in eligible rural areas, a credit score of at least 640+ is typically required. 

If you are a veteran, active-duty service member, or surviving spouse, and considering using a VA loans, a credit score of at least 620 is typically required. However, just like with the other loan options mentioned, some lenders may have higher requirements.

Improving Your Credit Score

Now that you know what your credit score needs to be to buy a home, let's discuss how you can improve your score. Here are some steps you can take:

Check Your Credit Reports

The first step to improving your credit is to check your credit reports for errors. You're entitled to a free copy of your credit report from each of the three major credit bureaus (Experian, Equifax, and TransUnion) once a year from annualcreditreport.com. If you would like your credit scores for all 3 credit bureaus as well, it will require an investment, here is our favorite credit monitoring company that we use in our company. 

Now, go through each report carefully and make note of any errors or inaccuracies. If you find an error, file a dispute with the credit bureau to have it corrected.

Pay Your Bills on Time & In Full

Your payment history is one of the most important factors in determining your credit score, it makes up to 35% o your scores.. Make sure you're paying all of your bills on time, as agreed, and in full. This includes your credit card bills (at least the minimum amount due), loan payments, and utility bills. If you're having trouble making payments, contact your creditors before you miss a payment to see if you can work out a payment plan.

Reduce Your Credit Card Balances

Credit utilization, which is the amount of credit you're using compared to your credit limit, is another important factor in your credit score. Ideally, you should keep your credit utilization below 10%. If you have high balances on your credit cards, work on paying them down as quickly as possible.

Don't Close Old Credit Accounts

The length of your credit history is also a factor in your credit score. Don't close old credit accounts, even if you're not using them, it could impact your utilization. Your credit history will remain in tact for 10 years, however, your utilization will be impacted right away. 

Limit New Credit Applications

Each time you apply for credit, it can temporarily lower your credit score. Limit your new credit applications while you're trying to improve your score – especially during the home buying process. 

Types of Negative Accounts You Can Ignore

Not all negative accounts on your credit report are worth disputing or paying off. Here are some examples of accounts that you may want to ignore:

  • Paid Charged-off Accounts with a $0 balance – it it’s older and paid, removing it won’t increase your scores much.
  • Medical Collections – Some government backed loans (such as FHA) ignore medical collections, and others will not put as much emphasis on them. If they are newer, removing them could increase your scores. If they are older and not updating every month – not so much. 
  • Regular Collections Under $2000 – Brand new negative accounts should always get your attention, however, many lenders have a policy in place that collections under $2000 do not have to be paid. This obviously varies from lender to lender. If paying the collection will result in a deletion and/or will lower your overall debt-to-income ratio and you can afford to pay it without taking funds from what you need to close on your home – pay it. 

Final Thoughts

Fixing your credit score to buy a home can seem overwhelming, but it's important to remember that it's a gradual process. By addressing negative items on your credit report, paying off debts, and practicing good credit habits, you can gradually improve your credit score and increase your chances of being approved for a mortgage. Remember to check your credit report regularly, and don't be afraid to seek professional help if you need it. With time and patience, you can achieve your goal of homeownership.

Looking to Claim the Keys to Your New Home? Grab Your Free Homebuying Buying Checklist Today! 

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