One of the most important things that you should always keep in mind is that your credit scores are crucial if you plan to buy a house. It can be merely a three-digit number, but it plays a great role in getting home loans, personal loans, and auto loans. Most lenders prefer to choose a person with a good credit score to offer home loans.
A lower credit score will work as a sign that you may not be able to make on-time payments. Besides, if you have a poor credit score, a financial institution will charge higher interest rates on loans.
Do you have a bad credit score? Well, don’t worry at all, as there are different ways through which you can increase your credit scores. So, keep reading to explore the ways to fix your bad credit to buy your dream home.
What Do Lenders Consider Bad Credit Scores?
Some people think that nowadays, most lenders don’t consider a good or bad credit score. But the fact is, most lenders neglect to ask for a minimum credit score to offer their services.
The quality of the credit reports will depend on the information offered by three major credit bureaus. These are Experian, Equifax, and TransUnion.
These credit report agencies regularly check the peoples’ credit utilization ratio, their bank accounts statements, unpaid debts, and more. They then provide credit reports to different financial institutions.
The borrowers’ credit reports will depend on the data generated by these agencies. But sometimes, the lenders prefer to consider the fico score to evaluate the creditworthiness of the borrowers.
According to the FICO score, there will be five credit score categories under which the home buyers may fall. These are:
- Less than 580- Poor credit score
- 580 to 669- The score is fair
- 670 to 739- The borrowers have a good credit score
- 740 to 799- The score is very good.
- 800 and above- Exceptional
However, the lenders may consider more than a Fico score in some cases. For example:
- They will check whether the borrowers are making on-time payments or not.
- Down payment history of the borrowers.
- The income of the borrowers.
- Are there any bad credit card debt and credit issues?
How Is The Credit Score Calculated?
A credit score is a combination of data offered by the three major credit reporting agencies. As per the Fair credit reporting act, one can get a copy of the credit report to check the credit score. Besides, you can check the minimum credit score from this.
Every bureau will offer you a different score. But the fluctuation will be very minimal. If you are wondering how credit bureaus calculate your scores? Here are some important factors they consider.
Your Current Credit Card Debt And Loan Terms
It covers around 30 percent of the score. Your current debt can include different factors, such as the number of credit cards you have, types of cards you use, amount you owe, credit utilization limit, credit balances with different lenders, available credit limit, etc.
You should remember that high personal loan balances and maxed-out credit cards can affect your score.
Besides, hard credit inquiries can also hurt the score. Lower credit card balances can increase your score, assuming that you pay them on time.
Your Payment History
More than 35 percent of your credit score depends on this factor. The payment history may include various factors such as how fast you replay your missed payments or overdue payments, how often you make or miss your payments, and more.
If you want to quickly enjoy a higher credit score, you should forget to make the payments on time.
Your Recent Credit Activities
One of the major reasons behind the lower credit scores is the borrowers’ recent credit activities.
In general, when you apply for multiple credit cards within a short period and request an increase in your credit limit, the lenders may think you are facing any financial troubles.
So, it is advisable not to apply for multiple new accounts at once. Or else, you can face a low credit score issue.
Your Account Diversification
Most creditors prefer to lend the borrowers with a mix of credit accounts, such as credit cards, home loans, installment loans, personal loans, and more.
Your Credit History Length
If you have a longer credit history, this will provide that you will follow the exact patterns. Besides, a good record of on-time payments will surely increase your score.
So, if you are dealing with low credit scores, you will have to consider all these factors and find out where you are making the mistakes.
Is It Possible To Buy A House With A Bad Credit Report?
The standard mortgage loan terms generally require a credit score of around 630 and more. Some lenders can offer you a conventional loan if your credit score is more than 620. But not all lenders follow this rule, and they consider other important factors before offering you a loan.
If your score is below 580 and you are looking for a loan to buy a house, you can apply for an FHA loan. An FHA loan is a good option for people with lower credit scores.
The Federal Housing Administration supports all FHA loans and can help you fulfill your dream. Besides, you can also apply for USDA loans if your credit score is low. However, there are a few points to consider.
With these bad credit home loans, like FHA and USDA loans, you may have to pay higher interest rates. But the best part is that it can help you increase your credit score.
Some Tips To Increase Your Credit Scores
Build A Credit File
Creating a new account is crucial in creating a solid credit record. After all, it is not possible to build a good record if you don’t have an account in your name. So, first, you need to create some new accounts in your name.
You can go for a secured credit card, a credit-builder loan, or more. Getting a reward credit card without any yearly fee can also be a good option.
Check Your Credit Reports Frequently
You should frequently pull out your credit account statements or reports from the credit bureaus to check your score. Besides, the report can show you where you are making a mistake.
As per a report published by the Federal Trade Commission, one in five customers has some material error in their reports. Well, such errors can lower the score.
If you are making payments on time and still the report shows a late payments error, you should write to the credit bureaus to solve this as soon as possible.
Resolving unpaid collections can take time. So, you should start the process immediately if you want to get a loan at lower interest rates to buy a house.
Well, you can get a free credit report from a government-run site. For a detailed report, you may need to go for premium services offered by the credit bureaus.
It’s Time To Improve The Payment History
Your payment history covers more than 35 percent of your overall credit score. So, you need to develop a habit of making the payment on time.
You can’t erase all your late payments from your credit file, but you should begin making the payments on time to that your new credit report can come with a higher score.
Not just your credit card bills; you should pay any of your monthly bills late, such as your monthly mortgage payment, power, internet, phone, medical bills, VA loans, etc.
Don’t Forget To Maintain Your Older Credit Cards
If you have some old credit cards, you should try to use them as long as possible. And keep paying the bills on time. This way will be able to build a good and longer credit history. As a result, your credit score will increase in the future.
Pay Down Your Revolving Account Balances
Even if you pay your bills on time, having a high credit balance on your revolving credit accounts will show a higher credit utilization ratio and lower score.
Your revolving accounts will include lines of credit and credit cards. If you can maintain a low balance on them, you can increase your score.
People with higher credit scores always keep their credit utilization rate as low as possible.
Take Help Of Credit Repair Company
If you find it challenging to fix your limited credit history, you can take the help of a credit repair service. The experts can easily identify the negative factors and errors in your reports and will take the necessary steps to resolve this as soon as possible.
A professional credit repair company may charge around USD 70 to USD 100 per month. If the errors are very complicated, they will charge more. You can choose the credit repair plan offered by them and stay relaxed.
You Can Request For Rapid Rescoring
Most professional mortgage lenders can help their clients boost their credit scores through rapid rescoring.
It is a process where 100 percent accurate data is provided to the credit bureaus, requesting them to replace the incorrect information with the new one within five working days.
However, you should keep in mind that this can only be done by a company specialized in this process and has access to the data of a credit reporting company.
If you are making late payments, you cannot rectify those entries. But if you are making your credit card payment on time and the services provider reported that as a late payment, you can rectify this error by submitting proof.
You can do it yourself, but it can take more than 20 days. But with experts, you can get it done within a few days.
Don’t Create Any New Accounts
If you want to get approved for your home loan, you should not apply for a new credit account. Applying for a new account means making hard credit inquiries, which can hurt your scores.
As per the experts, if you have made six or more inquiries within a few days, it will make you appear desperate for funds, and the mortgage lenders will doubt your creditworthiness. Getting a log will be challenging. So, try to make limited inquiries.
Become An Authorized User
People dealing with a limited credit history issue build credit by becoming authorized users.
If you have friends and family members with better credit, you can add yourself to the credit accounts as an authorized user.
You will not use these accounts, but the regular payments made by your family members will display on the report, which will create a positive image.
However, become an authorized user of a family member with a low score or high credit balance.
Repairing a bad credit history can take time. You should give yourself at least four to six months to repair the score. However, if there are some major issues, it can take up to one year.
Just keep making the payments on your collection accounts on time, check the report frequently, and maintain a good credit card balance to show an increase in your score.
If you don’t have much time and want a home loan now, you can go for FHA loans and VA loans. You can take these loans with a bad score. But it may require you to make a bigger down payment and higher interest rate.
And if you have time, follow the steps mentioned above and increase your score to enjoy a home loan with a lower interest rate.