Secrets to Restoring Your Credit Score so You Can Buy a Home

Most Americans strongly desire to own their own home. Most of us want to have their own property that they can decorate as they wish and raise a family for years to come.

But buying a home today can be a major hurdle for some as their credit history prevents them from getting the credit they need. Having a high credit score can make all the difference between being a renter or a home owner.

Do you want to own a home in 2019? Then learn the secrets we reveal below to boost your credit score.

Where Are You Now?

To get started in the home buying process, your first step is to acquire a copy of your credit report from the three major credit reporting bureaus – TransUnion, Experian and Equifax. Some creditors will send payment information to each bureau, while others will send information to only one or two. Also, when the lender checks your credit, they normally use the middle score to determine your loan eligibility.

If you see errors on your report, you need to contact each bureau by mail or online and dispute the errors. Some errors can be substantial and lower your score, so do not neglect this step.

Reduce Debt

It may not be easy, but the quickest way to boost your score is to reduce your debt. If you are able to pay off $10,000 in credit card debt, you will easily raise your score by 30 points. This is a huge boost that can really help you get a great rate on your home loan.

The most important debt to dump is revolving credit card debt with variable interest rates. This debt increases your credit utilization and lowers your score. While other forms of debt also affect your score, credit card debt is the best to reduce ASAP. Installment loan debt, such as a personal loan or car loan hurts your score less because this is installment debt with a fixed rate. This is viewed by the bureaus as 'better' debt, as long as you make the payments on time. So, dump the CC debt first and watch your score soar.

Take Out a Personal Loan

Related to the above tip, consider getting a personal loan to consolidate your consumer debt. You may score a much lower rate than on your credit cards. In 2018, credit card rates often near 30%! And this is revolving debt that can take many years to pay off if you make the minimum payment.

A personal loan, on the other hand, is an installment loan with a specific end date, usually in three to five years. The rate is nearly always lower; in 2018, it is possible with great credit to get an 8% rate on personal loans, and around 12-14% with average credit. These are much lower rates than credit cards, and you will definitely retire that debt in a few years if you make your payments.

You should have an easier time getting a mortgage with personal loan debt vs credit card debt. Last, having a personal loan diversifies your kinds of debt, which also can help your score.

Make All Payments on Time

If you have been missing loan payments, your credit report will have some negative marks on it. This may not be fatal to your home loan hopes, but it will certainly complicate the lending process and will result in higher rates.

At least a year prior to applying for a home loan, make certain you are paying all your bills on time. Having a clean payment record for 1 or 2 years before applying for a home loan is a huge help. Even if you had a 'credit disaster' a few years ago, such as a foreclosure, if you have an on-time payment history in the past 1-2 years, you still may qualify for a home loan, albeit with a potentially higher rate.

Beware of Applying for Too Much Credit

In the year before you apply for a home loan, we recommend limiting the number of credit lines you apply for. Do not apply for more than three credit lines of any kind in one month. Your score will drop several points each time you apply for a new credit line. The lender for your mortgage might see all of these applications for credit and wonder if you have financial problems.

Never Max Out Credit Cards

Credit cards can help your credit score when used responsibly. This means not using more than 30% or so of your maximum credit line at any one time. Ideally, pay off the entire card every month if you can. If you cannot, you should review your spending habits, so you do not end up with revolving debt.

Reduce Your Debt to Income Ratio

Add up your monthly expenses and divide it by your gross monthly income. If your DTI is over 50%, this is high. Try to get it down to 43% or so to look best in lenders' eyes.

Don't Close Accounts That Are Unused

It is mostly a myth that you should close an old credit card account with an unused credit line. Why? Because that open credit line increases your amount of available credit and reduces your credit utilization. Plus, the age of credit lines affects your score. An open, unused 10-year-old credit line of $10,000 is helping your score. Close it and your score will almost certainly drop.

With these vital tips in mind, you will soon be able to raise your score and get approved for a mortgage.