Fixing Your Credit To Buy A Home

Is your bad credit holding you back from the American Dream of home ownership?

You’re not alone.

During the Great Recession, millions of Americans watched their credit scores plummet. And although the nation’s average score has rebounded nicely to 700, according to the latest reports from the credit bureaus, there are definitely people still struggling.

(In case you were wondering, 700 is considered a “good score.”  It’s not GREAT, but it’s good. And people can generally get decent financing with a score of 700 or higher.)

So the question is… how does one get their score up above that coveted 700 figure to buy a home or land a great interest rate on a new car?

The answer isn’t an easy one to swallow.

According to MyFico.com, “It's important to note that repairing bad credit is a bit like losing weight: It takes time and there is no quick way to fix a credit score. In fact, out of all of the ways to improve a credit score, quick-fix efforts are the most likely to backfire, so beware of any advice that claims to improve your credit score fast. The best advice for rebuilding credit is to manage it responsibly over time. If you haven't done that, then you need to repair your credit history before you see credit score improvement.”

That doesn’t mean there aren’t things you can do to improve the situation.

In fact, depending on your credit situation, doing nothing could result in stagnation right where you are in BadCreditVille.

Here are 4 steps you can take to start fixing your credit to buy a home. 

Pull Your Reports

The first step to fixing your credit to buy a home is to start by ensuring your credit report is ACCURATE. 

Federal law entitles you to one free credit report per year, which you can obtain at https://www.annualcreditreport.com/index.action.

Fix errors

If there are errors or debts on your credit report that DO NOT BELONG TO YOU, the next step in fixing your credit to buy a home is to dispute those items. This can be a bit of a process, depending on how many errors you find and on which of the 3 credit bureau reports. But if there are errors, it’s necessary to get those fixed.  NOTE: it may not be advisable to “dispute” items on your report that are valid. Many debts “fall off” your credit report after 7 years of inactivity. And in some cases, after those lenders prove the validity of the entry on your report during the dispute process, the 7-year timeline of that debt RESETS to the date of your dispute!

Stay On Top Of Changes

After you’ve pulled the official reports (or if you have trouble pulling yours), it’s a great idea to get hooked into a service like CreditKarma.  Just visit https://www.creditkarma.com/  to sign up. There, you’ll be able to keep tabs on the day-to-day changes in your score and the items on your report for FREE. (They also offer some other great services, like free tax prep software and help). Knowing your credit progress and keeping ahead of changes is an important step in fixing your credit to buy a home. 

Keep On Keepin’ On

Once you get caught up on any debt payments that were behind, it’s critical to keep up the positive movement by ALWAYS being on time with your payments.  Put monthly payment reminders in your calendar. Set automated drafts and payments to ensure the debts are always paid.

Bring Down Debt Load and KEEP It Down

Now that your credit report is showing you are making payments on time each month, the next step to fixing your credit to buy a home is to get your debt load into the range that banks and the credit bureaus consider “ideal.”

How much you owe, versus how much credit you have available accounts for a whopping 30% of how your FICO® Score is calculated!

Seriously. This is where you can really make your credit score climb FAST!

For a rapid recovery of your credit score,  it’s crucial that you keep your credit card balances at 30 percent of the credit limit, OR LESS! This 30 percent “credit utilization” rule applies to each card individually, AND to the cumulative limits of all your cards.

When fixing your credit to buy a home, don’t close credit card accounts after they’re paid off. (Cut them up if that’s the only way you can ensure you won’t use them, but don’t close the accounts.)

And DON’T open a bunch of of new credit cards you don’t need trying to bring your debt utilization ratio down to 30 percent. (This approach could actually backfire and lower your credit scores).

Just keep what you have and work towards getting your credit utilization where it needs to be. Baby steps are okay. If your cards are all maxed out right now, start with a credit utilization goal for 75 percent. Once you reach the goal, set a new one at 50 percent.

What To Do If It’s Too Much To Handle

Here’s what Experian has to say:

If your debt feels overwhelming, it may be valuable find a reputable credit counseling service to assist in fixing your credit to buy a home. Many are non-profit and charge small or no fees for their services. You can review more information on selecting the right reputable credit counselor for you from the National Foundation for Credit Counseling. Credit counselors can help you develop a Debt Management Plan (or DMP) and can negotiate to reduce your monthly payments. In many cases, you'll be responsible for only one monthly payment to the credit counseling service, which will then disburse funds to all of the accounts you owe on.

NOTE: These types of debt management solutions can show up on your credit reports. Although debt management arrangements don’t directly impact your credit score, these debt solutions could temporarily affect your ability to obtain credit.