The question you may be asking right now would be: Is it possible to buy a house with bad credit? Planning to buy your first home should begin even before you decide what house to buy. One of the first steps in becoming a home-owner is understanding if you can finally afford it. The key to your first home is learning to understand your credit. Without it, you can’t open the doors to the house of your dreams.
What would be a good credit score in buying a home? Generally, a credit score of 700 – 720 is considered good enough for a home purchase. Any score above 800 shows an excellent credit score. On average, most credit scores fall in between 600 – 750. Any score below this figure will have a negative impact on your home loan. Having a top score can get you through the front door while a bad credit can leave you freezing in the open.
Whether you are looking into buying a home now or into the near future, it’s important to maintain a good credit score before doing it. Yes, you can buy a house with bad credit. But it will cost you a bad deal. Any mortgage you may get out of this will lead you to pay more for your home. Aside from that, you are risking yourself to be exposed to adjustable mortgages – these are loans with interest rates that would hike after a certain period of time. The only way to prevent this from happening is to start boosting your credit. And the best time to start is now. Here are 5 steps you need to take to achieve the minimum credit score for a home loan:
STEP #1: Understand Your Credit Situation
The first step is to get a credit report as soon as possible. To get a glimpse of your current situation, a credit report will help you access your next steps and the severity of your credit issues (if there are any). Minor issues on credit can take months to repair so knowing is already 80% of the battle. There are different ways of getting a report. Under the FACT Act, you are entitled to a free one from each of the three credit bureaus. Start by going to the annual credit report website to access yours now. As much as possible, avoid having mistakes on your report. At least 1 in 4 individuals who get declined for a home loan are usually the result of having inaccuracies on their credit report. If you discovered them, make sure you fix them. There are step-by-step guides on disputing faulty credit reports. Once you make a claim, you should get a response in under 30 to 60 calendar days. Get moving and make the necessary follow-ups. Ensure you get a good glimpse of your credit situation before taking on any steps.
STEP#2: Pay Your Balances
Once you know your credit score, take the necessary actions to improve it. One of the biggest factors in defining your credit score is through your payment history. If you want to increase your scores over time to buy your home, don’t ever miss a loan payment! Not once, not twice – Never! Always make more than the minimum payments offered on your credit card. Having a history of paying the minimum amount has a negative impact on your score. Paying more is not only good for your credit score, it’s also good for your finances as well. You’ll save more money out of interest payments. Always keep a low balance. Keeping your balance under 50% of your credit limit is beneficial.
STEP#3: Re-examine your debts
Always pay off your debts on credit cards. Avoid paying them off with another card. Credit card companies understand when you try to reduce balances in between cards by sallying them back and forth. Usually, they will give you penalties for doing this. Accruing this additional cost outweighs the benefit of having a clean card at all. When you paid-off an account, try not to close it prior to applying for a mortgage. This plays bad for your credit score. Use your credit cards for some large ticket payments you may have to retain your credit standing but pay them off in full after. Remember, use your card sparingly. The objective is to create a payment history not to drown yourself into debt.
STEP#4: Plan Your Purchases
When you are nearing a purchase of a home, it’s best to avoid any other big changes to your finances. These may come in the form of a brand new car, an overseas vacation or any expensive purchases with credit. These large buys can distort your financial situation. Banks are hesitant to approve mortgages when you pile on liabilities before any home purchase. Make sure that you monitor all your credit card purchases and you hold off any big spending before the approval of your mortgage.
STEP#5: Repair Your Credit (if needed)
Improving your credit may take a large amount of effort and time. Starting by planning ahead how to pay down and control your debt. If your credit is in the worst shape, you need to take the necessary steps to repair it. If you want to learn more about fixing your own credit, check out this free guide I made that helps explain that. (insert hyperlink to repair guide landing page). If you don’t have the time to do this, or you feel it is too complicated for you to do, try consulting with a credit repair agency. These skilled consultants will know how to make a positive change on your credit score or rating. But not all credit repair agencies are equal. Check out my review of the top rated credit repair agencies here to give you a bird’s eye view of who to do business with.
Bad credit does not mean you won’t have a chance of owning a home. Start by repairing your credit before buying your first home. Focus on improving your payment history and controlling how much you owe.