How Repairing Your Credit Can Help You Buy a House

Interested in repairing your credit so that you can buy a home?

Having a good credit score is important for more than one reason. During the home buying process, your credit score helps determine not only what you’re qualified for, but other important things like your interest rate.

You could save yourself thousands of dollars over the life of your mortgage with even a slightly higher score.

This guide on credit restoration will explain why this is the case and how to boost your score.

What Does Your Credit Score Consist of?

Your credit score consists of four factors. Combined, they show lenders your ability to handle borrowed money and pay it back over time.

The four factors are:

  • Payment history (biggest component)
  • Credit history length
  • Credit mix
  • Total amounted owed

The best credit score to buy a house is around 720 or above. When the score is above this number, lenders generally want to work with you and offer favorable interest rates.

The highest a credit score can be is 850. This means you have a flawless history of paying back your debt on time. It also means you’ve borrowed money in the past at a good rate. 

Repairing Your Credit When Buying a Home

The credit repair process can be a stark wake-up call for some when they first go to buy a home.

Maybe you find a place you want to buy go, then sit down at the bank. Then they tell you that you don’t qualify for a mortgage — or you do, but the interest rate will be quite high.

It doesn’t matter when you anticipate your home purchase happening. Perhaps you’re still a few years away from even really considering it. Even so, now’s a good time to look at your credit score.

Repairing your credit takes time. A bad mark on your credit score can linger for up to seven years, meaning ghosts of the past could come back to haunt you.

However, your score will generally go up if you practice the same good habits for a year or more. Even a low score can be improved tremendously with consistent effort.

Homebuying and Interest Rates

It’s one thing to be told you don’t qualify to buy a home. It’s another to be told that your interest rate will be double what a normal person might be offered due to your bad credit history.

You really have to look at compound interest to understand how much mortgage rates impact your bottom line. Consider this example:

Say you got a $200,000 mortgage at a 3 percent interest rate (very low but not impossible in today’s market if your credit score is good). You would pay back $303,555 over a 30-year mortgage at this rate.

Now, say you took out the same amount of money with a 5-percent interest rate due to bad credit. Your mortgage would go up over $100 a month, and you would wind up paying $386,512 over the life of the loan.

A two-percent difference equals almost $83,000 in extra interest accumulated during the life of your loan.

Boosting Your Credit Score

So, how do you boost your credit score? Here are some tips to help you get that score up when you buy your home.

Improve Your Payment History

Payment history is generally the biggest piece of the pie on your credit score. If you want your score to go up so that you can buy a home, make all your payments on time for the foreseeable future.

Settle With Collections

Outstanding bills in collections, missed medical payments, and bankruptcy filings also factor into your score. These act like dead weight or anchors on your credit score. Once you clean them up, your score could improve.

Call collections and get these squared away. In some cases, you may be able to settle for a third or half of what you owe if you can pay it off in one lump sum. Just be sure to get this in writing and don’t give collectors access to any of your personal accounts.

Pay Off Credit Cards

Credit cards can be a real killer. Typically, credit agencies reward you for spending 30 percent or less of your available line of credit. If you’re at or near your threshold, this is likely hurting your score.

The other problem with credit cards is their high-interest rates. It can feel like you’re getting nowhere if you aren’t paying more than what you owe each month.

It might be helpful to pay minimums on all of them except for the smallest balance, then put whatever you have leftover onto that balance to get it lower.

Report Errors

Sometimes, credit agencies mess up. Look on your credit report to see if there are any mistakes or inaccuracies that could be removed from your score.

It’s not guaranteed that you’ll win the dispute, but it’s worth trying. These errors are typically removed from your credit score within 30 days, which isn’t bad if you’re trying to buy a home.

See a Credit Consultant

Credit consultants offer expertise in the area of boosting your credit score. They can help you dispute claims, settle with collections, or advise you on how to attack your debt.

Don’t Open Any New Accounts

If you’re hoping to buy a home and have bad credit, don’t open any new accounts. New activity could stymy your other good habits or even lower your score — even if you’re paying down debt and not missing any payments.

Pause on credit scores for now while you save up the money you need for a down payment on your home.

Repair Your Credit

Repairing your credit takes time. If you’re trying to buy a home soon, it’s never too early to start working towards a better score.

Focus on the four areas of your score and pay off debts. Dispute any inaccurate claims. And speak with a credit expert to see if they can help you raise your score.

Contact us today to learn more about the services we offer.

Don’t let bad credit hold you back from the life you want.