As a Realtor, the first thing we help potential new home owners with is a pre-qualification. This is important for many reasons, but mostly because we need to know what our client’s budget will be, if and when they qualify. It makes no sense to look at homes before that.
Our first step is to recommend that our client seeks out a Mortgage professional to begin the process. If you don’t have one, we have some great suggestions. The nice part is that they will take you through a step by step process to qualify and if for some reason they are not able to immediately qualify you, they will help you come up with specific plan to get qualified. For serious potential home owners, I always recommend beginning this step as soon as possible. Some clients wait to get their credit score up and others simply fear the process, quite often delaying their chance at home ownership. Start right away!
What credit score do I need to qualify for a mortgage?
Many people don’t know that you can qualify with credit scores as low as 500. The minimum FICO credit score for an FHA loan is 500 or higher. If your score is at least 580, you also need at least a 3.5% down payment. You can still get approved for an FHA loan with a credit score lower than 580 and down to 500, but you’ll need a larger down payment of at least 10%.
A good credit score is anything above 670 in the FICO credit scoring model, and will allow you to access more loan and credit card options with more favorable interest rates. But the closer your score is to the maximum of 850, the better.
Keep in mind that you likely have many credit scores, due to the various ways scoring models weigh information. But the principle that higher scores indicate stronger credit (in other words, less risk to the lender) generally holds true across the board.
That being said, there are many other factors involved with qualifying at such a low credit score but here are a list of 21 very specific things you can do to get your credit score up and running on your way to becoming a home owner.
1. Set Up Automatic Bill Payments
The most important factor in your credit score is payment history. Help protect your score from the adverse effects of a missed payment by putting your bills on autopay. Make sure you have enough money in your checking account to cover each bill every month to avoid an overdraft. When you know you won’t have to deal with a sudden score dip after a forgotten bill, you can focus on other ways to improve credit.
2. Pay Down Balances
The second-most crucial component in your score is how much debt you’re carrying compared with your credit limit—your credit utilization ratio. In 2020, make it a goal to reduce any high interest credit card debt first, since that likely costs you more money in interest than, say, an auto loan or federal student loan does. Decreasing your credit card balances also shows potential lenders that you’re responsible with credit. Experts suggest keeping your credit utilization ratio below 30% of your credit limit at all times; those with the highest credit scores have a rate in the low single digits.
3. Get a Credit-Builder Loan
If you’re focused on building credit from scratch or recovering after a hit to your score, a credit-builder loan from a credit union could help. You’ll make fixed payments for six to 24 months, and your money will sit in a savings account you’ll be able to access at the end of the loan term. In the meantime, the lender will report your on-time payments to the credit bureaus, strengthening your score.
4. Seek Out a Secured Credit Card
Another option for building credit is to get a secured credit card. It requires a cash deposit, typically between $200 and $3,000, which becomes your credit limit. You can then use the credit card as you would any other, and the deposit protects the issuer from the possibility that you won’t pay off your balance. If you use a secured card responsibly, you could upgrade to a traditional unsecured card down the line.
5. Join an Account as an Authorized User
You can also improve credit by joining a family member, friend or another trusted person’s credit card account as an authorized user. You’ll be able to use the card to make purchases, and the card’s payment history will show up on your credit report. That makes it crucial to pick someone whose credit you will benefit from. Work with the primary cardholder to pay them for your purchases, as they’ll be ultimately responsible for any balance on the card.
6. Dispute Credit Report Errors
You’re entitled to one free credit report per year from each of the three main credit bureaus at AnnualCreditReport.com. Check them each carefully, and file a dispute with the appropriate bureau if you find something on your report you believe shouldn’t be there, such as a late payment. Correcting any issues could give your credit scores a lift.
7. Register for Experian Boost™†
Experian Boost lets you add on-time telecom and utility payments to your credit report, which could lead to a hike in your FICO® Score*. It’s free, but it will only affect your Experian credit report and your FICO® Score 8, one of several credit scores lenders may look at, depending on the loan you’re seeking. The average Experian Boost user sees a 13-point increase in their credit scores.
8. Keep Old Accounts Open
Even if you no longer use an old credit card, it’s typically best to keep the account open. That’s because your credit scores benefit from a long credit history and a high total credit limit. Closing established accounts will shorten the average age of your accounts and lower your total credit limit. It will take years before an account closed in good standing drops off your credit report, but the effects on your credit utilization rate are immediate. If a credit card comes with a high annual fee you can’t afford, closing the account could be a good option—or ask your issuer to downgrade the card to a no-fee version if possible.
9. Limit New Lines of Credit
When you apply for a new credit card or loan, a hard inquiry will appear on your credit report. That may lead to a brief dip in your score. Plan to apply only for the credit you truly need, after you’ve done enough research to understand which accounts you’ll likely qualify for. That means avoiding multiple hard inquiries cluttering your credit file.
10. Limit Loan Applications to a Short Time Period
Lots of hard inquiries in a short time could be an indication to lenders that you’re searching for lines of credit you won’t be able to pay. Smart borrowers, though, will apply for a few loans of the same type to compare rates. For that reason, credit scorers tend to treat multiple hard inquiries of the same loan type made around the same time as one, so submit applications within a short time frame. That will prevent your credit score from suffering.
11. Pay Off Credit Card Balances Every Month
In addition to lowering existing debt balances, minimize ongoing debt by making it a goal to pay off your credit cards each month. Zeroing out your balance each statement period keeps your credit utilization low, which is one of the best ways to strengthen credit. You’ll also avoid incurring interest charges.
12. Track Your Credit Score
When you monitor your credit score, you can intervene quickly if it drops. You can address factors that influence your score, such as high balances, late payments or too many recent hard inquiries. There are many ways to check and monitor your credit score for free, including through your current credit card issuer or bank or through companies like Credit Karma.
13. Protect Your Personal Information to Avoid Fraud
Your credit can be affected by identity theft, which is when fraudsters access your personal information and open accounts in your name. To help keep your data safe, use a password manager to create and store unique passwords and avoid making financial transactions on public Wi-Fi networks, which could leave you vulnerable.
14. Responsibly Add to Your Credit Mix
Lenders look for a mix of accounts in your credit file to show that you can manage multiple types of credit. These include installment loans, for which you pay a fixed amount per month, and revolving credit, which comes with a limit you can choose to charge up to (as is the case with credit cards and home equity lines of credit). If you only have one type of credit in your file, adding something different could improve your credit mix. Credit mix accounts for just 10% of your FICO® Score, however, so don’t apply for credit simply to improve your score. That could put you at risk of taking on debt you can’t repay.
15. Create a Budget
To help pay off debt and keep your spending in check long term, take time in 2020 to make a budget. This process will offer clarity on the amount you’re earning and how much you can safely spend on discretionary items. You’ll then be more likely to make smart choices when you’re tempted to use a credit card, and you can prioritize limiting your credit utilization.
16. Work With a Nonprofit Credit Counseling Agency
If you feel unsure how to set up a budget or start attacking debt, a certified credit counselor at a nonprofit agency can provide a free initial consultation to discuss first steps. Credit counselors also offer debt management plans, which can help some borrowers pay down overwhelming debt.
17. Avoid Credit Repair Scams
Some for-profit companies claim to be able to remove negative information from your credit report for a fee. But the truth is that no company can legally erase information from your file if it’s accurate. Avoid spending money on credit repair and take tried-and-true steps to improve your score instead, like lowering debt balances and paying your bills on time.
18. Add Rent Payments to Your Credit Report
If you regularly pay rent on time, add those payments to your credit report to boost the amount of positive information reported to the credit bureaus. You can do so by signing up with a service like RentTrack or PayYourRent. In many cases, getting your landlord or property management company on board will limit the fees you’ll be charged.
19. Get a Loan With the Help of a Cosigner
Making on-time payments toward an installment loan, similar to making timely payments on a credit card, helps build credit history. Besides using a credit-builder loan, getting a traditional one such as a car loan can add positive information to your credit report and improve your credit mix.
If you can’t qualify for a loan on your own, a cosigner can help—but make sure the cosigner knows what they are getting into. If you can’t afford to repay the loan, it becomes their responsibility. Also, as always, only seek out a loan if you really need it, not simply to improve credit. Potentially boosting your score should be an added bonus or motivation, not the central reason.
20. Ask for an increase in your line of credit on existing credit cards. If possible, call your credit card company and ask them for an increase in your limit. This can temporarily and easily change your credit to debt ratio on the credit line, which will boost your score fairly rapidly.
21. Have Patience
Improving credit isn’t an immediate process. An excellent credit score is most often the result of years of conscientious financial behavior. While some strategies will let you see small improvements quickly, joining the ranks of those with the highest credit scores will take time.
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