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Having bad credit can definitely hinder your ability to get approved for a mortgage, but it doesn’t have to be the end of the story. Whatever the reasons are for getting into the position you are in, there are ways to fix it and to make significant improvements to your credit score. You do not have to suffer from bad credit forever.
Lenders typically like to see borrowers with a minimum credit score of 680 before approving mortgage applications. A lower credit score generally means the borrower is more of a risk and may be less capable of making mortgage payments on time.
Key Factors Affecting Credit Score:
There are a few key factors that impact credit scores:
Payment history – Missing payments have a big negative impact on your score. Your credit score takes into account missed or late payments, how long they were overdue, and how often.
Debt – All outstanding amounts that you owe your creditors; the amount owed on specific types of accounts, and the amount of available credit you have used all play a role in determining your score. As a general rule of thumb, try to keep the balance on your revolving credit (i.e. credit cards and line of credit) at a maximum of 50% of the credit limit.
Length of credit history – “Old” credit is typically considered good credit. Any accounts that you have had open for at least two years can positively affect your credit score, which is why it is typically recommended to keep these accounts open, even if you are not using them. The best type accounts for this are revolving accounts - credit card or line of credit
“Hard” inquiries – a hard inquiry is when a lender or a mortgage brokerage pulls your credit report; for example, when applying for a credit card or looking for car financing. Also, applying for a number of different credit accounts within a short timeframe can have a negative effect on your score.
6 Steps to Repair/Improve Your Credit Score
Step 1: Check Your Credit Report
The first step in repairing your credit is to determine which areas need improvement. You can request a free copy of your credit report from Equifax and TransUnion. This credit report will help you understand the reasons behind your low score, and it will place you in a better position to create a plan of attack. You should also check the report for any errors that may also be affecting your score. Incorrect details can be addressed and corrected by the creditor.
Step 2: Make Arrangements to Pay Down Debts
As your payment history is one of the largest factors affecting your credit score, your credit situation is unlikely to improve much unless you get your accounts up to date. If you can’t afford to bring all your debts up to date at once, work with your creditors to see if you can arrange a repayment plan that works for you and your budget.
Step 3: Rebuild Credit With A Secured Credit Card
Showing that you can pay back borrowed money is a very important part of building credit. One of the best ways to rebuild credit is with a secured credit card. With your debts and payments up to date, it is now time to build a consistent payment history. A secured credit card functions like any other unsecured credit card, but you must provide a security deposit as a form of collateral before you can use the card. This deposit assures creditors that you will indeed pay back the money you borrow. How you use your secured credit card conveys to your creditors whether or not you can handle credit responsibly.
Step 4: Make At Least The Minimum Payment 2-3 Business Days Before The Due Date
As you work towards building your credit history, it’s critical that you make your payments on time, and this goes for non-credit bills as well. A missed utility payment that is way past due, an outstanding cell phone bill, or old parking tickets can get reported to the credit bureaus, so it’s important that you start establishing a reliable payment history by paying at least the minimum payment on all your bills 2-3 business days before the due date to allow for processing. You definitely want to avoid missing payments or constantly making late payments.
Step 5: Set Up Automatic Payments
Setting up automatic bill payments will ensure that all bills are paid on time each month. This way you will never miss a payment. Be sure that sufficient funds are always in your account to avoid any NSF charges. NSF’s can also reflect poorly to any lender/bank when qualifying for a mortgage.
Step 6: Adopt Good Financial Habits
Developing smart spending and saving habits are crucial to rebuild your credit score. Create a budget that accurately reflects how much you earn and how much you spend. This will show you how to live within your means, and help you to better manage your money.
Rebuilding Credit Takes Time and Patience
Having poor credit can limit you in one way or another, for example, when it comes to applying for your 1st mortgage. The bad news is that there are no quick fixes to rebuild credit. The good news is that rebuilding your credit is possible - once you choose to get started and follow the steps to do so. It requires time, patience, and financial discipline. Follow the 6 steps outlined here and you can expect to see an improvement in your credit score and credit history.
***If you are wanting to purchase your 1st home now, but due to poor credit score and/or credit history you will not qualify for a mortgage, a Rent To Own (RTO) Program can be a good solution - if you are employed full-time and have savings to use towards a down payment (recommendation of at least $15,000), connect with me to discuss if the RTO Program would be a good fit for you.
