How to Fix Credit to Buy a House
Updated December 4, 2019 . AmFam Team
Buying a house is a huge financial decision, so you’ll want to make sure your credit is in good shape before you start shopping. Your credit score can affect the amount of money lenders will loan you, as well as your mortgage interest rate. Having bad or mediocre credit can severely limit your house-buying options. If your credit score is between 500 and 620, you’ll want to work on bringing it up before you start looking at houses. Here are a few ways you can go about fixing your credit fast to buy a house.
Start Fixing Your Credit
Addressing a poor or okay credit score can seem intimidating, but there are a few tried and true ways of helping to fix it. Just because you have a low credit score now doesn’t mean you can’t bring it up into the average or above-average range. We’ll help you get your credit where it needs to be so you can buy the house of your dreams.
Review your credit report
Understanding the information in your credit report is a key part of addressing a poor credit score. There are a few critical things that go into determining your credit score, including:
The age of your credit. The longer you’ve maintained open credit lines, the more positive impact they have on your credit score. Basically, you’re showing that you can successfully maintain credit over time.
The amount of debt you have. The more debt you have, the more negatively it affects your credit score. Paying off debts, like student loans and smaller-limit credit cards, can help raise your score.
Your credit payment history. If you’ve paid your bills on time across all your lines of credit, you should expect to see positive growth in your credit score. Things like missed or late payments, or defaulting on a line of credit altogether, will negatively affect your score.
The amount of credit lines you have open. While the number of credit cards you have doesn’t have a strong effect on your score, it can help or hurt depending on other factors like payment history and debt. If you have three or four credit cards and pay them off regularly, there’s a good chance your credit score is benefiting from that. But if you have three cards that you miss payments on, there’s a good chance your score is being negatively impacted.
Knowing what these pieces of your credit look like is an important step toward fixing your credit. For example, high debt and a spotty payment history can negatively affect your credit, while having a long history of credit and only a few open credit lines can positively affect your credit.
Dispute any errors on your credit report
If you see anything that doesn’t look right on your credit report, you’ll need to get it corrected. You can do this by filing a dispute with the credit reporting agency your report came from. This usually involves providing evidence of the mistake, so be sure to gather as much information as possible before filing a dispute.
Pay down any remaining debt
If you have a lot of debt, paying it off or at least focusing on bringing it down can help improve your credit score. Using the snowball method can help you pay off debt faster. This involves paying off your smallest debts first and only the minimum payments on your largest debts until the smaller ones are totally paid and you can contribute more to your larger ones.
Set up automatic payments on any credit cards you have open so you don’t miss any payments. Paying regularly on time can dramatically improve your credit score. Check out our tips for paying off credit card debt.
Avoid making purchases on credit
While you’re paying off your debts, avoid purchases using credit cards or other credit lines. Adding to your debt won’t help you pay it off faster, and it could hurt your credit in the long run if you overspend.
Don’t open or close any lines of credit
While it may seem tempting to open a new credit card after maxing yours out, every credit line you open negatively dings your credit score. Closing lines of credit, even if you’ve paid them all off, is also a negative hit to your score. Avoid opening or closing any lines of credit while you work on getting your credit score into a good enough place to go house shopping.
What Credit Score Do You Need to Buy a House?
The credit score you need to buy a house can vary from lender to lender. Most lenders will only offer mortgages to people with a credit score of at least 580, but the most competitive rates and lending packages go to those with great credit, or a score of at least 760. It’s important to monitor your credit while you improve it so you know what credit score you’re at before you start the home buying process.
Need More Guidance on Buying a Home?
Is your credit where you want it to be? Ready to start shopping for a house? Check out our first-time home buyers guide to learn all about the process of buying a home and how to prepare for things like the final walkthrough and closing costs.
This article is for informational purposes only and based on information that is widely available. This information does not, and is not intended to, constitute legal or financial advice. You should contact a professional for advice specific to your situation.
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Can Student Loans Affect Buying a House?
Typically, student loan debt doesn’t prevent you from getting a mortgage. The biggest thing to note is that student loan debt does influence your debt-to-income ratio, which is a factor lenders consider before giving you a loan. It can also affect the interest rate you pay on your mortgage.
Buying a house with defaulted student loans
If you’ve defaulted on your student loans, it’ll be more difficult — but not impossible — for you to get a mortgage. Because defaulting negatively affects your credit score, lenders will be less likely to want to give you a loan or will charge a much higher interest rate on a loan.
Getting a home loan with student loan deferment
If you’ve deferred your student loans, this usually won’t affect your chances of getting a mortgage. Just be sure to consider how the future estimated payments will factor your debt-to-income ratio. Some types of mortgages may reject applicants with deferred loans, so do your research on the different types of mortgages before shopping.
Should You Pay Off Student Loans Before Buying a House?
Buying a house is expensive, there’s no doubt about that. It can seem smart to hold off on house shopping while you still have student loan debt, and it can be even more difficult to save for a house if you’ve got a high debt-to-income ratio. But if you have enough income to handle the payments for both, you may want to consider investing in your first home.
Signs You Should Pay Off Student Loans
When considering whether to pay student loans or save for a house, there are a few factors that can help you decide if paying off your student loans should be a priority.
Your debt-to-income ratio is too high
If the amount of money you bring in monthly or yearly is almost the same as the amount of money you pay out in debts — like student and car loans or credit cards — it may be best to pay down your debt before buying a house.
You’ve defaulted on your loans
Defaulting on your loans has a severe negative impact on your credit score, which tells lenders that you’re a bigger risk to take on. Work on improving your credit score before shopping for a mortgage.
You’re struggling to make payments
If you feel like you’re living paycheck to paycheck or struggling to make payments on your loan every month, it’s best to hold off on saving for a house. Need help keeping track of your student loan payments? Try our student loan payment tracker to get organized.
You haven’t saved for a down payment or emergency fund
Before you start picking out which houses you want to tour, you should take a look at your savings. If you don’t have enough for a 5 to 10 percent down payment or enough as an emergency fund for home expenses — like a broken dishwasher or damaged roof — take more time to put money away for your first home.
