Buying a home is a quintessential step in achieving the American dream, but if you have lackluster credit, the process can seem daunting. Wondering if home ownership is possible for you? And what do you need to do to make this dream a reality? First, you need to work on improving your credit score. Here’s a look at the main steps involved:
Familiarize yourself with your credit report
When granting mortgages, lenders look at several elements, but your income and credit score are the central players in the decision-making process. Before you start showing your credit report to lenders, you need to familiarize yourself with your score and what’s on your reports. Ideally, you should pull a credit report from each of the three major credit bureaus, Equifax, TransUnion and Experian. Each of these reporting bureaus includes similar information on all of their reports, but there are some variances, and it’s important to be abreast of everything.
Address errors on the report
Once you know your credit score, you can start working to improve it. First, address mistakes in your report. Common mistakes include duplicate accounts, debts from an ex-spouse, and incorrect information related to your name, address, social security number, or addresses. Other mistakes include accounts that have been marked closed by the lender when they were really closed by you. To clear up these issues, you need to contact the organization (bank, collection agency, etc) reporting the information as well as the credit bureaus themselves.
Start paying down debts
Once you have addressed the errors on your credit report, start paying down your debts. Typically, to pay off debts as quickly as possible, you pay down the account with the highest interest rate, followed by the account with the second-highest interest rate, and so on. However, when trying to improve your credit score, you need to take another approach.
Credit scores take into account the portion of each line of credit that is in use, and the lower that number is, the better. To illustrate, imagine you have $5,000 in debt on a single credit card with a limit of $5,000. You also have two cards with a zero balance. In contrast, another person has $5,000 in debt, but it is spread out over three cards, which each has about $1,700 on them and a credit limit of $5,000. The credit scoring system benefits the latter person more, as it does not look favorably on maxed-out accounts.
Use credit deletion letters
As you pay off your debts, you need that information reflected on your credit report. Unfortunately, lenders or collection agencies often overlook updating the reports. To ensure that they do, use credit deletion letters. These letters specify that in exchange for you paying off or settling the debt, the collection agency agrees to remove the negative file from your credit report.
Start exploring mortgage lenders
Once your credit score is in order, it’s time to start exploring lenders. In addition to traditional mortgages, there are also mortgage guarantee programs through the Federal Housing Authority or the Department of Veterans Affairs. FHA and VA loans are granted through commercial lenders, but as these loans are guaranteed by the government, they tend to have lower interest rates and higher acceptance rates for consumers with less than perfect credit.
Fixing your credit to buy a house is not impossible, but the process can be easier to navigate with the help of a professional. Ready to learn more about credit repair services? Contact Build My Scores to set up a free 1-hour consultation.