Fixing Your Credit Score to Buy a House

They say home is where the heart is.

But let’s face it—consistently paying your landlord’s bills every month can only cause you continuous heartbreak. 💔

Millions of Americans are in the boat of throwing away hundreds of dollars every month to the costs of renting. And new reports show that nearly 1 in 5 millennials have given up the dream of homeownership and have accepted the idea of renting forever. All of this because buying a home can be a daunting (and expensive) task, especially if you are a credit-challenged consumer.

In current times, buying a home can be more tempting than ever… even if you have bad credit. And if you can’t resist the temptation, then it’s time to work on improving your credit score to achieve the goal of homeownership. 

But how do you do it? And where the heck do you begin? Stay tuned: We’ve got the answers for you. 📺

What you’ll learn

• Good Credit Score to Buy a House
• Understand Your Credit Score
• Fix Your Credit Report
• Fix Credit to Buy a House (5 Steps)
• Buying a House with Subpar Credit
• No Down Payment with Bad Credit?
• Home Buying and COVID-19
• Fixing Credit to Buy a House: FAQs

What’s a Good Credit Score to Buy a House?

Want to cross the dream of homeownership off your bucket list? Well, you’re going to need to have a decent credit score to do so.

Your credit score can impact the amount of your required down payment, your interest rate as well as the type of loans available to you. But, the truth is there is no one set credit score needed to buy a house. 

Because of the variety of loan programs out there you actually have many options. However, the better your credit, the better chances you stand of qualifying for the absolute top-of-the-line mortgage loans. 

The minimum score to buy a house can range anywhere from 580 to 640 all depending on the type of mortgage loan. In general, a score of 660 will at least qualify you for the best programs and loan products. 

In 2020, the average consumer had a FICO® score of 711. A score in this range qualifies you for decent loan programs and decent rates. And a score of 720 or higher will get you the absolute best rates and programs. 

Understanding Your Credit Score as a Homebuyer 📈

If you are on a mission to improve your credit to buy a house, it first pays to understand your credit report and the factors that make up your credit score. To know where your score fits on the credit scale, and how credit-based decisions affect it is key.

The first thing to know is that there are three different credit reporting agencies, or credit bureaus: Transunion, Equifax, and Experian. The three bureaus collect consumer credit information and make it available to lenders or third parties.

It’s important to understand that the big three bureaus simply report the information. The decision to deny or approve a credit application lies with the lender/creditor. When it comes to mortgage lending, most lenders pull a Tri-Merge credit report, which is a report that combines data from all three bureaus.

Also understand that there are two major credit score models, VantageScore 3.0 and FICO®. Both models have multiple ingredients that carry different weights in the formula of your credit score. The FICO® scoring model is currently the most popular model, being used by an estimated 90% of top U.S. lenders/creditors.

There are five main factors to the FICO® model: Credit Utilization, Payment History, Age of Credit, New Credit, Credit Variety, and Age of Credit History. Additional calculations can also include hard inquiries in the mix.

Payment History 📅

The largest chunk of your FICO® score is Payment History, accounting for a total of 35% of your score. Your documented track record to pay your debts is important to assessing if you can pay your new debts. This means that payment history is also likely the first thing any lender will look at. After all, why would a lender extend you new credit if you struggle to pay your previous obligations? 

Any late, missed, or incomplete payments (not covering the minimum due) can be reported to the bureaus and affect your payment history. To establish a good payment history, make sure to make your payments in full and on time.

Revolving Credit Utilization 💳

Also referred to as total amounts owed, your Credit Utilization is the second largest factor of your FICO® score. Accounting for 30% of your score, it’s important to not occupy an excessive amount of your credit line. 

For example, having four maxed-out credit cards can dangerously impact your score. Using a lot of your available credit is a red flag for lenders as it potentially indicates that you are overextending. Alternatively, try carrying a lower balance month to month or use 30% or less of your total variable credit.

If you can maintain a lower amount of revolving utilization, you are for sure to see a jump in your credit score. And it seems like many consumers have recently learned this tidbit because despite the pandemic induced economic crisis the average credit card usage has dropped by 9%.

Age of Credit History ⏳

The age of your credit history accounts for 15% of your score and over time will increase your score. A longer credit history indicates a higher likelihood of good account management and borrowing habits. 

The age of credit history is determined by averaging out the length of all of your accounts. While the age of credit history is important, it’s not a major factor. It’s still possible to have a good score and relatively new credit.

Variety Of Accounts 📒

10% of the score calculation comes from your credit mix or the variety of accounts. Having a variety of different types of credit is good as it shows your ability to maintain different types of accounts. If you have a multitude of accounts including credit cards, installment loans, mortgage loans, and retail cards, you are good to go.

New Credit ✨

Opening several new credit accounts within a short time frame reflects a greater risk. This is especially true if you have a newer average age of credit history. Even though new credit only weighs in at 10%, do your best to avoid opening too many accounts in a quick manner.

Not only does opening multiple new accounts harm this sector of your FICO® score, but it can also produce too many recent hard inquiries, which can also damage your credit score. 

Watch For Reporting Errors 🔍

In addition to understanding these credit factors, it’s suggested you keep tabs on your credit report by monitoring it frequently. This is truthfully the first real step to understanding your credit score. 

From time to time, negative entries can actually be mistakes or illegitimate marks. And negative entries can potentially cause your credit score to take a dive. Credit reporting errors have doubled in the past year, so it’s evident that the practice of clerical errors messing up your credit isn’t going away any time soon.

Catching misreporting and mistakes as they happen is key to maintaining good credit. After all, it can be super frustrating to be penalized for something that isn’t truly your fault. So the bottom line is the sooner you catch it, the better!

How to Fix Your Credit Report 🩹

The first step to fixing your credit to buy a house is to get yourself into the frequent habit of monitoring your credit report. But what exactly happens if you notice an illegitimate entry or error on your credit report? How do you correct the issue? And how do you even get your credit report? Read on to answer all those burning questions. 🔥

Obtain Your Credit Report 📝

The first thing to do is to get your free credit report. Under consumer financial rules, consumers were entitled to receive credit reports for free at least once a year. However, now, because of the pandemic relief efforts, you can get your credit report once per week.

While you are entitled to a report, there are actually a variety of ways you can obtain it. First, you can use a free credit reporting service to keep general tabs. If you choose this method beware as the score reflected on a credit reporting website or app may not be entirely accurate. In recent times consumers have found their score inaccurate in comparison to other reports. 

Additionally, if you have a major credit card issuer you may also be able to access your credit report through them. Some credit card issuers or loan companies do this as a courtesy to their customer by offering them weekly updates of their credit score.

But perhaps the best way to get your most accurate and up-to-date credit report is to visit AnnualCreditReport.com. This way, you can get a copy directly from the 3 bureaus, so you can make sure that the score you see on there is legit. 

How to Spot Errors 👀

After deciding how to get your credit report, rather through a credit monitoring service or the annual credit report website, take the time to thoroughly study your credit report. Specifically, look for anything that appears to not be a legitimate account, remark, and anything that you believe shouldn’t otherwise be on your report.

For example, late payments or other debts that are older than seven years should not be on your credit report. Hard inquiries should automatically fall off after two years. And finally, check to make sure the small details are correct, including names and addresses.

How to Dispute With the Credit Bureaus 👩‍⚖️

Found and illegitimate entry? Time to submit a dispute then!

The Fair Credit Reporting Act, mandated by the FTC, requires the credit bureaus to verify any dispute or entry. If the bureaus fail to verify the legitimacy of the entry then they must remove the remark from your credit report. You can dispute almost anything on your credit report: late payments, hard inquiries, new accounts, collections, judgments, repossessions, and more.

To submit a dispute, you’ll need to contact the three major credit bureaus. Here’s how you can do that:

Experian  

Equifax

TransUnion

Call in the Professionals 💼

Finding the process to be a little bit overwhelming? That’s entirely understandable. Maybe you find yourself doing every single thing you can think to do yet your score isn’t moving. Or what if the clock is ticking and you need to buy a house sooner rather than later?

If you are struggling to make credit progress on your own, it may be time to hire a professional credit repair agency near you. These trained professionals are the expert in credit repair and can yield some surprising results. But remember to be cautious—the practice of credit repair is full of both scammers and downright terrible companies.

The process can be a little bit expensive as well, so it’s super important to do your research and thoroughly check out the companies. If you take the time to research and can spare the extra cash, it can most definitely be worth your time to hire a repair company.

How to Fix Your Credit to Buy a House (in 5 Steps) 🏡

They say the first step in problem solving is to properly identify said problem. This crucial first step remains your first course of action when it comes to credit related problem-solving. But, by now you are likely a pro at spotting errors on your credit report, and disputing them with the credit bureaus. 

And if you are a Millennial, you may already have a surprise knack for personal credit repair. This became evident in 2020 as the millennial generation led the charts for score improvement over any other generation. 

But for those who aren’t so fortunate enough to self-repair their credit, no matter what age category you fall into, don’t get too discouraged by statistics. You too can fix your credit in just five simple steps, and here’s how:

Step One: Continue to Monitor Your Credit 🕵️

You may have weeded out all of the errors and illegitimate entries. But, that is never an excuse to stop monitoring your credit report. Consistent monitoring allows you to detect and prevent identity theft in a timely manner, so never ever stop checking up!

Step Two: Improve Your Payment History ✔️

As we previously stated, payment history has the highest impact on your credit score. The large percentage (35% to be exact) carries some hefty weight. Establishing good payment habits by paying all your bills on time can do wonders for your credit—and can put you in a position to buy a house in no time.

Because of the large impact, you can see how just one or two late payments can drastically affect your credit score. Additionally, late payments can also cause other issues including the surfacing of collection accounts, repossessions and can even lead to the drastic process of bankruptcy. 

But, time is the key with all things credit-related. The longer a late payment is on your credit report, the less impact it will have on your score. And in seven years, you should see the late payment completely fall off. 👍

Step Three: Pay Down Your Credit Card Debt 💳

The second fact to face: credit utilization (or percent of balances owed) leaves the second greatest impact on your credit score. Weighing in at 30% of your total score, if you carry a large maxed-out credit card balance every single month, you are hurting your credit. And you are most definitely also hurting your chances of buying a house.

In general, consider utilizing around 20-30% (or less) of your credit limit. This means that if you have a credit card with a $5,000 limit, carry a balance of no more than $1,000 to $1,500. If you are one of the 51 million Americans who were forced to increase their credit card debt in the wake of the pandemic, you may want to work on this factor sooner rather than later.

Step Four: Avoid Opening Any New Accounts 🚫

If you desire to buy a home in the near future, do not apply for any new credit accounts. A new credit account can lead to a hard inquiry on your credit as well as directly negatively impact the age of your credit history. Both of these factors can negatively impact your credit score.

Also, having multiple inquiries (usually six or more) in a short period of time can give off an appearance of desperation. Lenders may become suspicious or question your creditworthiness when seeing you are quick to apply for new credit.

On the flip side, if you are shopping for the best rates on auto or home loans, most credit reporting agencies will consider inquiries made within 14 days as one inquiry. Plus, the negative impact on your credit score dissipates after one year even though the inquiry sticks around on your report for two.

Step Five: Prequalify/Shop Around 🛒

Get an idea of what mortgage products you qualify for by researching and shopping around. Prequalifying is a great way to avoid hard inquiries and to get an understanding of how much of a mortgage loan you may qualify for.

Be careful though—prequalifying isn’t the same as being pre-approved. Preapprovals require submitting more financial records and documents and often result in a hard inquiry.

Check with the specific lender you are interested in working in to ask if they offer soft-check pre-approvals. Many of the best mortgage lenders out there do offer preapprovals, you just have to know where to look.

Optional Step: Hire a Credit Repair Agency 📁

Just as they can help you with reporting errors, a credit repair agency can also help fix your credit. They can help you take all of the steps on your behalf and also help you devise debt management plans. They are trained in spotting errors and in disputing even legitimate entries.

If you find the entire process to be too much to handle but need to fix your credit ASAP, consider calling a credit repair agency near you. Just remember to do your research on the agency.

Buying a House with Subpar Credit 📉 

Feeling pretty confident in the credit interpreting and repair process? Sweet! With some time and effort, you’ll be on your way to both good credit and homeownership in no time.

But what if you don’t have the time to spare and have poor or subprime credit? If you fall in that category, buying a house isn’t entirely out of the picture for you. It is definitely possible to get a mortgage with bad credit.

To buy a house with bad credit, consider some of the following options:

• Save Up For a Larger Down Payment 💲

Cash sure is king. There is no exception to this rule when it comes to home buying. The more money you have to put down on your future home, the better off you will be. And the more likely you will be able to qualify for a loan program.

• Consider Getting a Cosigner✍️

While it may be a slight blow to your ego, look into getting a cosigner. A cosigner will help your approval odds by adding their own income and credit into the equation. Having a cosigner will also help you get a more favorable interest rate while allowing you to simultaneously take advantage of today’s historically low rates. Just be careful who you ask as asking someone to cosign a mortgage loan is a big favor to ask. 

• Check Out Situation Specific Loan Programs 🏢

There are a slew of mortgage loan programs out there. Government-backed loans, first-time homebuyer loans, and even mortgage loans for homebuyers with bad credit. Even if the compromise is a higher interest rate or out-of-pocket costs, you never know what you can qualify for until you look.

• Rebuild Your Credit 🏗️

As much as it may not be ideal, the only option for you may be to take the time to focus on rebuilding your credit. If you can’t achieve even a poor to fair score of 580 to 620, you are going to have a hard time achieving a mortgage loan. If this is your situation, your only option may be to focus on your credit. 

Buying a House With Bad Credit and No Down Payment ❌

Have bad credit and a shortage of cash? We won’t sugarcoat it—buying a home might be a little tricky for you. But, tricky doesn’t mean impossible. Government-backed loan programs can be a great way to achieve homeownership if you are in this situation.

As we’ve already explored, the credit requirements tend to be more lenient for these types of programs. One popular program includes loans backed by the government agency the Federal Housing Administration. The FHA loans’ low requirements (you only need a 580 credit score 🤯) make them a go-to option for millennial homebuyers. Also, there is also only a down payment requirement of 3.5%, so applying isn’t that hard. 

What about a loan program that doesn’t require a downpayment? Well if you’ve served or are currently serving in the United States Military, you are in luck. You can qualify for a VA loan, a loan partially backed through the United States Department of Veteran Affairs. The credit requirements are lenient, no private mortgage insurance is required AND you can buy a house for zero down.

Buying a House During COVID-19 😷

You would think a global pandemic that has negatively impacted the economy and job market would have a negative effect on the housing market. However, this is most certainly not the case. There has been an unexpected boom in the markets and the increased desire to buy homes for several individuals.

The increase in demand can likely be attributed to the historically low-interest rates of 2020, extending into 2021. But, the desire for homeownership has also created a shortage of homes in several markets. It’s the basic rule of supply vs. demand. 🤷

Housing prices may be on a steady rise, but remember that inventory is only going to get lower. If you are fortunate enough to have the credit and the cash on hand, now might be the time to buy.

However, it’s a tricky situation. With such uncertainty around the economy and the pandemic, we understand the hesitation. But if one positive event is to come out of the pandemic, why not make that event becoming a homeowner? 

About the author

Summer Nevins

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Summer is a banking professional and business school graduate turned expert finance writer. Raised in a small low-income town in the southern United States, Summer, like a lot of millennials, learned the ropes of personal finance the hard way. Both her work and life experiences led to discover her true passion for educating others about the complicated field of finance. Summer currently resides in the Greater Nashville Tennessee area with her husband. When she’s not writing, Summer enjoys exploring the beautiful world and hiking all of the challenging trails along the way.