It’s one of the undeniable truths of life that the worse your credit report is, the more challenging it will be to acquire a home loan. Consider this, that just a half a point difference in credit scores can mean that you end up paying tens of thousands of dollars more for your home over the term of your loan.
A low credit score says that you will be charged a much higher interest rate when you apply for a home loan. Imagine never getting out from under a mortgage, when all your friends have long paid their homes off, just because you started s off with a pathetically low credit score.
The amount of money you save when finally buying a home will be worth the time it takes to raise your credit score. Here’s how to study your credit report and clean it up as much as you possibly can; your future self will thank you while looking at houses for sale.
1. Take an honest assessment of where your credit and debt are now
Obtain a copy of your credit report and start assimilating the information on each one. Your first duty is to verify that everything is correct—your name, Social Security number, current and previous addresses, list of employers, debts and any public records concerning—any one of these things out of place could affect the overall score. Address any errors immediately; it will take some time, but it’s the surest way to make sure that your score is honest. Checking one’s credit on occasion is a good practice for citizens to safeguard themselves from identity theft.
2. Talk frankly to a lender or mortgage broker
Some lenders are more sympathetic and flexible than others. Check with local lenders what they are looking for to approve a homebuying loan. If the lender you want to work with is more prone to accept a credit score in the 500 to 600 range, then aim at a credit score of 600 or higher. A credit score of 750 and above is already excellent. Once you know where your credit score is at, you can begin to look at available houses for sale and really give yourself a goal to drive that credit score up. You may have to shop around a bit to find the right lender for you and you may even find one who will take into consideration your reasons for a poor credit score.
3. Pay off as many outstanding debts as you can and lessen your debt load
Many lenders look for a debt-to-income ratio to be below the 30 percent mark, meaning you’re not spending more than a third of your income servicing debt each month. Pay down all existing debts as fast as possible without depriving yourself and your dependents. This task will require creating a budget that aggressively pays down credit cards, student loans and any other loans that are hanging over your head before you buy a house. What’s the best way to pay off an elephant-size debt? One payment at a time. Start by focusing on the card or loan with the highest interest rate and consolidate what you can onto the loan, line of credit or card with the lowest interest rate.
If you follow this debt payment plan, you can begin to raise your credit score and keep an eye on it within your credit report which we know can take months even up to years depending on your situation.
Then you will have a much better opportunity to buy a house at a competitive interest rate. This whole process may seem like the long way to buying a home, and it is, but there will always be perfect houses for sale when your credit score is looking its best.