How to Clean Up Your Credit Before Buying a Home: Even if you don’t have great credit, you can still worktowards buying a home, whether you want to buy your first home or move into a new home from your current one. There areseveral simple steps you can take to clean up your credit,which can increase your chances of getting a mortgage, loweryour mortgage interest rates, and save you significantfunds.
Clean Up Your Credit Before Buying a Home
Here are the steps you need to take to bump up your creditbefore taking that journey towards a new
First, know how important it is
Some simple calculations can tell you how important it is towork on your credit score. Here are some
examples to show you what a difference a few points in yourcredit score can make. (Note: The rates
and numbers given here are just examples, drawn off of nationalaverage for lending rates.):
Let’s say you’re looking at a house that costs $200,000after your down payment. We won’t worry about complicatingfactors like insurance and closing costs – just the basic costof the house.
If your credit score is in the 620-659 tier, you mightqualify for a traditional loan at a rate of 7.096%.
With this type of mortgage rate on a thirty year loan, yourmonthly payment to the mortgage alone
will be about $1,340. Over the life of your loan, you’ll pay atotal of $283,668 in interest – more than
doubling your original loan.
Now, let’s say you up your credit score into the next tier660-699. Here, you can expect a mortgage
rate of, say, 6.286%. Here, your monthly payment will be$1,230, and you’ll pay a total of $245,000 in
interest – or a savings of almost $39,000!
Take it one step further and put your credit in the top tier760-850. In this tier, you could get prime
interest rates of 5.780%. In this case, your monthly paymentwould be about $1,170, and you would
pay total interest of about $221,545 over the life of yourloan. From the lowest credit tier we looked at, that’s asavings of over $62,000 in thirty years!
As you can see, bumping up your credit before you buy a homecan save you significant cash, so it’s
definitely worth your while to take the time to do this beforeyou buy a home.
Second, see where the issues lie
Before you start improving your credit, you need to knowwhat’s counting against you with your credit.
That means you need to pull your credit report, and the reportof your spouse or partner if you’re
planning to buy a home based on the financials of both yourselfand your partner.
You can get a credit report for free fromannualcreditreport.com, as long as you haven’t pulled one
from that particular company in the past year. It’s a good ideato pull a report from each of the three
reporting companies, Experian, Equifax, and Transunion, sincethey can sometimes include different
information (and different mistakes). You’ll also need to payeach company to give you your actual
On your credit reports, you should first check for mistakes.Then, look to see what is counting against
you, whether that be late payments, a lien out in your name,lack of credit history, or whatever. Make a list of the variousissues that are affecting your credit.
Third, start fixing the issues
Finally, you’ll need to start fixing the problems with yourcredit, of course. If you have terrible credit, just a fewsimple steps can often improve it dramatically. If you’refighting for the last few points to put your credit into thetop tier of 760+, you might need a little more time. Also, ifyou already have very good credit with few marks against you,be very careful not to make mistakes like turning in a paymentlate, as these mistakes actually tend to affect top-tier creditscores more than lower scores!
Here are some of the common issues with credit andhow you can go about fixing them:
Payment History: A huge part of your creditscore (about 30%) is based on your history of
making payments on time. This doesn’t just mean making your carand credit card payments
one time, either, as even late utilities payments can affectyour credit.
If your report shows late payments, start automating yourpayments and making them on time,
Debt Usage: If you have revolving debt,such as credit card debt, the goal here is to keep your
balances low, as compared with your limits. If you’re close tothe limit on a credit card you’re
having trouble paying off, consider transferring your balanceto low interest credit cards.
A lower interest rate and lower minimum monthly paymentmakes it easier to pay those
balances down, which is one of the fastest ways to increaseyour credit score.
Credit Age: The longer you’ve had credit,especially good credit, the better your credit is going
to be. Having accounts on your report that have been open formore than seven years does
wonders for your credit score.
While you can’t do anything to age your credit except forwait, you can keep from damaging
your credit in one way. Even if you’re paying down debts, leaveyour oldest account open at
all times. Otherwise, you risk making your credit appearyounger, which can harm you in this
Account Mix: Having a blend of differenttypes of credit in your portfolio is a good idea, and
increases your credit score by showing you can be responsiblewith both a car loan and a credit
card, for instance. Some people try to avoid using credit cardsaltogether, but not having a
credit card can actually harm your credit in this category.
If you don’t have any credit cards, you can quickly improveyour score by applying for one low-
limit credit card that you use for, say, gas purchases at thepump, and that you pay down every
month or only carry a very low balance on.
Inquiries: The more you apply for credit,the riskier you look to a lender. When your credit
report is pulled by a potential lender, employer, landlord, orinsurance agent, that inquiry
stays on your credit report. Too many inquiries in a shortperiod of time can count against you.
However, pulling your own credit report doesn’t count.
If you’re getting ready to compare loan offers for a bigpurchase like a car or home, don’t apply
for credit unnecessarily. Also, put in all your applicationswithin a week, and those inquiries will
count against your credit score as a single inquiry, since thecredit reporting companies know
you need to apply with various lenders in order to find theright loan for your needs.
According to the US Department of Housing and UrbanDevelopment, it’s possible to buy a homewhen you don’t have great credit, especially with the help ofprograms like the Federal HousingAdministration’s loan program for first-time home buyers whodon’t have great credit or a large downpayment. However, as you have seen, improving your credit byeven ten or twenty points can make ahuge difference in the total amount you pay for a home. So evenif your credit is in the tank and you’re going to buy a homethrough a special low-credit program, working on your creditscore before you buy is a good step to take.
If you already have average or good credit, it may take afew months to improve your credit score.However, those few months of continuing to rent or live in yourold home could save you tens ofthousands of dollars in the long run!
Daniela Baker, personal finance blogger at CreditDonkeysays, these simple steps aren’t always easy todo, but by working hard on your credit, you can get a betterdeal on your next home and save moneyover the long term.
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