Many home buyers make the mistake of looking for a home despite knowing that their credit is less than ideal to qualify for a home loan. For this reason, I always recommend you speak with me two to four months before shopping for a home. If not, you are putting the proverbial “cart before the horse.” As part of the review process, I will request a copy of your credit report. Your credit report will gives me the information I need to determine your ability to qualify for a home loan. If you don’t qualify because of your credit scores, we can use the tips below to fix up credit to buy a home.
Pay Bills on Time
Pay your bills on time. Paying your bills on time is the single most important component of determining your credit score. I listed it first because someone with good or excellent credit can sink their credit scores with a few or even a single late payment of 30 days or more. However, having late payments will not necessarily prevent you from qualifying for a home loan. You must continue making all of your payments on-time. As time passes, a late payment has a lesser effect on your credit score. Many people can experience a sizable credit score increase as soon as twelve months after the last late payment.
Update Public Records
A judgement, tax lien or other public record will have a derogatory effect on your credit scores. You must make sure the account is reporting the current status (paid, discharged, etc.) with each of the credit bureaus. Cities and counties are often slow or fail altogether in updating the credit bureaus when a public record account has been satisfied. Getting a public record account to update can be as simple as submitting satisfaction documentation to the credit bureaus for review.
In cases where there is an outstanding judgment or tax lien, make it a priority to get the account paid off quickly. You may also begin a payment plan to pay off the debt. However, starting a payment plan of more than ten months will be counted against your debt-to-income ratio (DTI).
Pay Down Revolving Debt
Another large component of your credit score is what credit experts refer to as your “credit utilization ratio.” This ratio is your balance relative to the available credit limits on revolving debit (credit cards). To determine your credit utilization ratio, add all your revolving account balances together and divide that number by the credit limits. Then, multiple that number by 100 and you will have your credit utilization ratio expressed as a percentage. Most industry experts recommend a credit utilization rate of 30% or less.
In addition, never close a revolving account or pay off an account in full unless instructed to do so. Closing an account can have a negative impact on your credit score. Factors that affect your credit score are payment history, available credit limit and length of time open. I advise borrowers to leave a $10 balance on their credit card accounts. Research has shown that people who have a credit utilization rate of 0% actually have lower credit scores.
Collection & Charge-off Accounts
Paying off a collection or charge-off account is not always the best action to improve your credit score(s). Nor is it required for all loan programs. These types of accounts often do not update regularly and paying off an account can cause the account to be updated and adversely affect your scores again. However, if you have an account that has been updated on your report in the past six months, it may be best to pay the account off or begin a payment plan with the creditor. I always suggest that you negotiate a lower payoff amount if possible.
Medical collection accounts seem to have less of an impact on credit scores the past few years. Medical collections accounts can be settled for less than the balance and removed as a condition of payment. Collection companies pay a fraction of the amount owed for the right to collect a debt.
With collection & charge-off accounts, it is best to work with an experienced professional to give you guidance on how to fix up credit to buy a home.
Dispute Late Payments & Unauthorized Inquiries
Disputing late payments, regardless of their accuracy, and having them removed can often have a positive impact on your credit scores. I recommend that borrowers only dispute late payments on closed accounts where the late payment is 24 months or older. Credit bureaus are required by The Fair Credit Reporting Act (Sec. 1681) to remove any disputed data within 30 days that is unverifiable. It is often difficult to verify information with a creditor you no longer have an account with on closed accounts older than 24 months.
You can dispute late payments and unauthorized inquiries online through each of the credit bureaus website’s. However, I prefer to utilize a dispute letter with the appropriate information and delivery confirmation of receipt. Third-party credit repair companies often utilize the online dispute form more frequently and do not seem to see the same amount of success in removing data as a mailed dispute letter.
Make A Plan to Fix Up Credit to Buy A Home
To fix up credit to buy a home, it is best to make a plan and take action. Utilizing some or all of the tips above can have a positive impact on your credit scores depending on your individual circumstances. I have seen borrowers see credit score improvements in less than two months. In some cases, results can even be almost immediately utilizing some of the tools and resources that I have available.
If you would rather seek the help of a loan professional and utilize all of the resources available to take decisive action on preparing yourself to qualify for a home loan, please contact me through my website or the phone number given. There will be some documentation requirements for your income, but I can make clear instructions available to fix up credit to buy a home within 48 hours.