7 Tips for Restoring Your Credit Score to Buy a House

As the housing market has been heating up the last two years, more renters want to make the plunge and buy a home. But what if you have bad credit? Can you buy a home with credit in the low 600s or 500s? In some cases, yes, you can. Programs such as FHA cater to people with lower credit scores, but it will be easier if you restore your credit to a higher level. Conventional lenders want to see a credit score of at least 680 and 700 is better. With these facts in mind, here are some secrets to restoring your credit so you can buy your dream home.

1. Check Your Credit Report

Three months before you plan to apply for a mortgage, check your credit report at the three major bureaus. You want to make sure there are no mistakes on your report, which happen more often than you think. If you see any mistakes, you can dispute them with the credit bureaus through the mail or online. According to an FTC report recently, about ¼ of credit reports have at least one 'potentially material' error.

2. Have Several Active Tradelines

To get a conventional loan, you should have a minimum of at least three trade lines, such as credit cards, student loans, and car loans. They should have been active in the last 24 months. FHA wants you to have two tradelines. You can have more than that, but if you have less than two, you cannot get an FHA loan.

If you need to open tradelines, it is a good idea to open a Visa or Mastercard a minimum of six months before you apply for a home loan. And if you want the best credit score, you should not charge more than 30% of your limit and pay it in full when you get the bill.

3. Leave Older Credit Lines Alone

Some people think that you should close old credit card accounts that you no longer use, but this is bad advice. Part of your credit score is how long your credit has been active. The older cards you have, even if you don't use them often, the more your credit score will be helped.

4. Do Not Open New Credit Lines

When you are a few months away from applying for your mortgage, you should not open any more credit lines. This can drop your score for a few months. The credit bureau is not sure how you are going to use that credit, so it is a risk to them. Lowering your score is not worth having a new $5000 credit line.

5. Do Not Buy on Credit

When in the home buying process, it is common to get excited and buy new appliances or furniture before the loan closes. But even if you are in escrow, having your debt utilization go over 30% before the loan closing could disqualify you from getting the loan. Have patience. Wait until the loan closes and funds before you use credit to purchase anything for your home.

6. Pay Off Debt

If you have any credit card debt, pay off as much as you can before you apply for your home loan. As soon as you pay it off, your score will rise by 30 to 50 points.

7. If You Have Damaged Credit from the Past

If your credit is really messed up from a foreclosure or bankruptcy, the first thing you need to do is be sure you are paying all your bills on time. A mortgage company will want to see that you are on your feet financially for at least a year before considering you for a loan.

You may need to open a new credit card or even get a small car loan and make the payments on it on time for a year. Doing these things can help you to reestablish your credit enough to get a home loan.