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Buying a home is part of the American dream, but having a bad credit score can make it difficult to reach this goal. A home is the largest purchase many people will ever make, and lenders want to ensure the borrower is able to pay their mortgage. If you have a low score, learning how to fix your credit to buy a house can help with your loan application save you money as well.
In this guide, we provide you with five simple ways to fix your credit to buy a house. Not only will repairing your credit increase your approval odds, but it can also help you get better interest rates as well. We’ll also provide you with some different ways to buy a home with a low credit score.
Should you fix your credit before applying for a home loan?
Knowing how to fix your credit to buy a house means looking for errors on your credit report that may be lowering your score. Some of the most common errors include:
- Inaccurate missed or late payments
- Account errors as a result of identity theft
- Incorrect personal information
- Closed accounts reported as open
Due to the Fair Credit Reporting Act (FCRA), you have the right to dispute errors on your credit report. By sending a 609 dispute letter, you can begin challenging these errors and potentially improving your score.
What credit score do you need to buy a house?
To receive a conventional loan, you typically need a credit score of at least 620. However, some lenders may require a higher score closer to 660. There are also government-backed loans, which have different requirements. For example, you can have a credit score as low as 580 for an FHA loan, but you often need a down payment of about 10 percent.
How credit score affects mortgage approval and interest rates
It’s also helpful to remember that your credit score plays a role in your interest rate. Lenders look at your score as a way to assess your credit risk. With a lower credit score, they perceive a borrower as more high risk, so they often charge much higher interest rates to ensure they’re making some money back on the loan.
Your interest rate can raise or lower your home’s total cost by hundreds of thousands of dollars. For example, a $425,000 home with a 20 percent down payment and a five percent interest rate for a term of 30 years would cost a total of $657,000. At an eight percent interest rate, that same home would cost closer to $900,000.
5 ways to fix your credit to buy a home
There are various ways to fix your credit to buy a home, and you can use multiple strategies to increase your score faster and improve your chances of approval. Many people want to know how long credit improvement takes, but it can vary depending on your individual situation.
1. Review your credit report and dispute errors
The best place to start is to get a copy of your credit report from each of the major credit bureaus and thoroughly review them for potential errors. Should you find errors or inaccuracies, you can take steps to work to get them removed.
2. Pay down your debt
One of the major factors lenders look at when reviewing your loan application is your debt-to-income (DTI) ratio. Lenders like Wells Fargo recommend a DTI of 35 percent or less, but this can vary depending on the lender. Paying down your credit card debt through debt consolidation or other methods also helps improve your credit score because your credit utilization is worth 30 percent of your FICO® score.
3. Pay off collection accounts
If you have accounts in collections, they can significantly lower your credit score. There are many ways to negotiate with collections agencies, and you can sometimes settle your debt for a fraction of what you owe. Collections can stay on your credit report for up to seven years, so it’s helpful to request a pay for delete letter to remove the collection from your report.
4. Become an authorized user
Those whose credit scores are too low to get approved for credit cards can become an authorized user. If you have a friend or family member with a credit card and a good payment history, they can add you as an authorized user. This allows you to “piggyback” off of their score, so as they make on-time payments, your credit score will also typically improve with a positive credit history.
5. Avoid taking on new debt
During the home-buying process, it’s a good idea to avoid opening any new lines of credit until the loan closes. Similar to how new credit on your credit report can lower your credit score, opening new lines of credit may indicate that you’re having financial difficulties.
How to buy a house with bad credit
Repairing your credit score can improve your chances of getting a home loan and getting you a good interest rate, but there are ways to get a mortgage with bad credit, too. One of the best options is to look for home loans for bad credit, and you have a few options:
Put down a larger down payment
Conventional loans typically require a minimum credit score of 620 to 700, but you can also offer to put down a larger down payment. This decreases the total amount loaned, which also decreases the risk for the lender.
Look into nonconventional loans
There are different federal loans you may qualify for that don’t require a high credit score.
- FHA loans: These are federally backed loans, and you can have a minimum score of 580. FHA loans may require a down payment of 10 percent.
- VA loans: Veterans can apply for VA loans, and these require a minimum score of 580. These loans allow $0 down, but you may need to pay a one-time “funding fee.”
- USDA loans: If you’re purchasing a home in a rural area, you may qualify for a USDA loan for a $0 down payment and a minimum score of 640.
Find a cosigner
Cosigners help mitigate the lender’s risk when you take out a home loan. If you have a friend or family member with a high credit score who is willing to cosign on the mortgage with you, it can improve your chances of getting approved. When using a cosigner, your credit scores are linked, so it’s important to ensure you make the mortgage payments on time if approved.
Be cautious of bad credit home loans
Some lenders specialize in bad credit home loans, only requiring a credit score of 575. Remember, a lower credit score often means higher interest rates. Due to the high risk of bad credit home loans, these loans can increase the cost of a home due to the higher interest rate.
Lexington Law Firm can help you assess your credit before applying for a loan
Assessing your credit and finding errors can be difficult and overwhelming, which is why Lexington Law Firm is here to help. We have 20 years of experience and offer free credit assessment so you can see where your credit currently stands and recommendations to improve your score.
Note: The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.