Exactly How To Build Credit To Buy a House. No Credit? Low Credit? No Problem.
What You Will Read In This Article
Your credit score is a critical factor that lenders use to determine if you qualify to receive a mortgage loan. Along with your income and how much of a down payment you have saved up, your credit score shows lenders how reliable you are to make payments on your loan.
There are a few things that credit bureaus look at when determining your score. They look at how long you’ve had a line of credit, how much of your credit line you’re using, how often you make payments on time, how many accounts you have open, and whether or not you have any accounts sent to collections.
Some of these factors have more of an impact on your score than others.
A higher score can impact the type of loan you’re eligible to receive and your interest rate. It’s possible to get approved for a mortgage loan with a poor credit score, but it’s going to affect how much you’ll be paying upfront, as well as in the long run.
If you have a low credit score or no credit at all, there are some steps you can take to increase your score. In this article, you’re going to learn exactly how to build your credit so you can buy a house.
13 Tips Guaranteed To Help You Build Credit For a Mortgage
Increasing your credit score can be a confusing topic. To help you, we’ve gathered these 13 tips that are guaranteed to build credit.
1. Download, Review a Credit Report from All 3 Bureaus and Resolve Errors
Knowing precisely what’s on your credit report is an excellent place to start building up your score. This is especially true if there are any errors on your report.
These errors can be something as simple as a wrong address. However, as rare as it may be, there could be more serious errors like a missing payment that was actually on time.
You can get a free copy of your credit report from all three credit bureaus once a year. The only website that’s authorized to give these reports is AnnualCreditReport.com. Be wary of any other website that offers to provide you with a free credit report.
If you find any errors on your reports, you must contact the bureau and the company or agency that reported the erroneous information.
Depending on the type of error, this can significantly impact your credit score.
2. Payoff Any Accounts Currently in Collections
Whether or not to pay off accounts once they hit collections has been debated for years. Sometimes paying off an account in collections can make your score decrease, but sometimes they increase. This all depends on the credit scoring model.
The best way to approach this subject is by looking at the pros and cons.
- When a scoring model excludes collection accounts marked “paid in full.”
- Having accounts paid in full looks more favorable to lenders than neglecting to pay them at all, regardless of whether paying it off affects your score.
- It can decrease your score for several reasons, including:
- Decreasing your credit age
- Change the types of credit lines you have
- Typically does not increase your score at all.
- It can be a waste of money if the debt is five or more years old, considering it’s removed from your report after seven years.
When deciding whether to pay off an account in collections, consider how old the account is. If the account is relatively old and is about to drop off your report, it’s not worth the trouble.
However, if it’s a newer account that just hit collections within the last couple of years, it may be more beneficial to go ahead and pay it off.
3. Pay Down Your Credit Balances as Much as Possible
Focusing more on your good standing accounts will have more of a positive impact on your credit score than what’s already in collections. Once an account hits collections, there’s not much you can do to improve how it affects your score. Taking that into consideration, make sure you’re paying down the balance on your active accounts.
Credit usage dramatically impacts your credit score, so it’s important not to max out your cards. Keep your credit usage around or below the 30% mark.
If you have a high balance on an existing credit card, pay this down to the optimal usage range. Once you do this to all your cards, you’ll see a good boost in your score within a month or two.
This also works well with loans. Paying off a larger chunk will improve your debt-to-income ratio without impacting the age of the loan. Be careful not to pay it in full though, as soon as the loan is paid off, it’ll shorten your credit age, which has a negative impact on your score.
4. Negotiate to Reduce Your Debt or Rate
People often forget that payments, interest rates, and debt amounts can be negotiated. Negotiating can be a long process, but if you have a lot of debt, or a sudden change in income, this can be beneficial.
Gather all your resources before you begin this negotiation process, such as the original payment agreement and any notices of late payments.
You need to calculate what you can currently afford to pay before contacting your account holder.
Once you get everything sorted out, you can begin the process. Don’t let the creditors bully you into paying what you owe in full. Explain why you need your payment reduced and be honest. Ask them to rework your repayment plan to suit your needs better so they can keep receiving payments.
You can also do this with interest rates and debts that are in collection.
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5. Setup Autopay for Your Bills
Most account holders report to all three credit bureaus once a month. Missed payments have the most significant impact on your credit score, so it’s important to consistently make your payments on time.
Payment history makes up 35% of your overall credit score, so making payments on time makes a big difference in your score.
If you’ve missed some payments, you can still improve your score. For minor financial mishaps—not a big event such as bankruptcy or home foreclosure—like missed payments or maxing out a credit card, the recovery time averages between three and 18 months.
This is where setting up autopay comes in handy. To continuously increase your credit score, set up your payments to be automatically taken out, so this part of your score improves over time. Within a year, you should see a substantial increase in your credit score.
6. Keep Your Balances Low
Another way to quickly increase your credit score is to keep your balances on your credit cards low. When you’re paying down your credit cards, you want to keep your credit usage below 30%.
The optimal usage amount is around 20-30% of your credit limit. For example, if you have a credit card with a $1,200 limit, keep the balance on that card to around $240-360.
Your credit usage has a high impact on your credit score, which is nice cause it’s one of the few factors that’s easier to take control over. You can pay down your credit cards and increase your score pretty quickly instead of waiting for derogatory marks to disappear over time.
7. Request a Credit Limit Increase
Another way to lower your balance is to request a credit limit increase. Just don’t make the mistake of using this extra credit.
For example, if you have a credit limit of $1,000 and currently have $600 charged on your card, that makes your usage ratio 60%. But if you increase your credit limit to $2,000 without charging anything else to your card, it would drop your usage to 30%.
The downside to requesting your credit limit increase is the hard inquiry made on your credit report. However, the good outweighs the bad because these inquiries don’t significantly impact your score—they are temporary dings.
8. Open New Accounts That Will Build Good Credit
Having various types of credit looks good on your credit report. If you only have one credit card, you may want to try a personal loan.
You want three types of accounts: revolving accounts, open accounts, and installment accounts.
When lenders are looking at your credit report, they want to make sure you can handle different credit accounts. This makes you look more reliable, and they’re more likely to be willing to loan you money to buy a house.
9. Pay 2x Per Month
Although paying more than once a month doesn’t typically impact your score at all, there’s a cool payment hack you can try to get around this.
The idea behind this is to trick the system into counting both payments instead of the usual single payment.
What you have to do is find your due date on your credit card statement, count back 15 days and pay half of your balance on that day, then pay the rest of your balance three days before your due date.
It’s worth noting that this is not a guarantee, but it’s worth trying out.
10. Get a Secured Credit Card
A secured credit card is an excellent jumping-off point if you have poor or no credit and a steady income.
These cards are easier to get approved for because they require a security deposit for the amount you want your credit limit to be.
Even starting off, these credit limits don’t have to be thousands of dollars. A credit limit of $300 would work to kick-start your credit score. Just remember to keep your usage below 30% of your limit. For $300, that would mean keeping your balance under $90
Secured credit works just like standard credit cards. Just make sure you get a secured credit card from a lender who reports monthly to all three credit bureaus, so you know it’ll boost your score.
11. Become an Authorized User on Someone’s Account
Another easy way to boost your score fast is by asking a family member to make you an authorized user on their account.
If you decide to do this to give your score a quick boost, make sure you choose someone who has good credit and makes their payments on time. If they’re someone who tends to max out their cards often, they wouldn’t be a good choice to share an account with.
Becoming an authorized user boosts your score by increasing the number of accounts you have. It can also help tremendously if you’re an authorized user on an account with a really high credit limit.
For example, if all you have is one secured credit card with a limit of $500 on your credit report, becoming an authorized user on an account with a $5,000 credit limit—provided the balance is low—will lower your credit usage and boost your score.
12. Obtain a Reasonable Auto Loan First
Although it’s not a good idea to take out a big loan while you’re shopping for a house, obtaining a reasonable auto loan is a great way to boost your score before you start looking for a house.
Remember that loans impact your debt-to-income ratio, a significant factor in getting approved for a mortgage.
But if you’re planning to buy a house in a few years and you’re getting a head start on your credit score now, this would be a great move.
When shopping for a car, keep it on the smaller end around the $10,000-15,000 range. Car loans are typically around six years, which increases your credit length and, in turn, increases your credit score tremendously.
Keeping your loan at a reasonable amount also won’t skyrocket your debt, making it even harder to get approved for a mortgage.
Having a car loan in your credit report will show that you’re responsible enough to handle more hefty payments long-term than a typical credit card payment. It’ll make you look more dependable, and that’s good when lenders are looking at your credit report.
13. Obtain a Credit-Building Loan
Credit building loans work similarly to secured credit cards. They can help those with no credit or poor credit build up their score.
The length of these loans is on the short side and can range between six months to two years.
The way they work is you apply for a credit-building loan from a credit union or a local community bank. The lender has a bank account to hold the funds for you until you make you pay off the loan. Once the loan is paid off, you have access to the funds.
Essentially, it’s building up a savings account, but you don’t get access to the savings until it’s paid in full.
You’re also obligated to pay the APR and interest along with any other fees like a traditional loan. However, the big upside is that they report the payments to all three credit bureaus, and you build credit while building up these savings.
If you still have questions about your credit score before buying a house, here are a few of the most frequently asked questions.
What credit score will allow me to buy a house?
For conventional loans and USDA loans, a credit score of 620 or higher is what you need to aim for. However, FHA and VA loans require a minimum of only 580.
If you’re interested in getting a conventional loan, keep in mind that your credit score may have an impact on your interest rates.
Can you buy a house with no credit?
If you don’t have any credit, FHA loans would be the route to go. They are the only kind of loans that don’t require a credit score. But this doesn’t mean you’re guaranteed to get approved. You need to research lenders and find ones that will consider approving you without a credit score.
Keep in mind that you still need to provide proof of on-time payments since they cannot pull proof of this through your credit report.
What factors do mortgage lenders consider to determine your borrowing eligibility?
Mortgage lenders look at various factors to determine how much house you can afford and what loans you’re eligible for. Debt-to-income ratio is one of the most important factors, so don’t take out any major loans while you’re house shopping.
They also look at your credit score and see how reliable you are at making payments on time. Even if your score is on the low side, if you have a good payment history, they’ll pay more attention to that than the score itself.
They also look at your collateral, the size of your down payment, liquid assets, and loan term.
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About the Author: Kris Lippi is the owner of ISoldMyHouse.com, the broker of Get LISTED Realty and an official member of the Forbes Real Estate Council. He actively writes about real estate related topics such as buying and selling homes, how-to guides for around the house and home product recommendations. He has been featured in Inman, Readers Digest, Fox News, American Express, Fit Small Business, Policy Genius, Lending Tree, GoDaddy, Manta as well as other major websites. Read more about us here.