How to Build Credit to Buy a House
It’s no secret that a good credit score is important if you want to buy a home. But what if your credit score is low, or you don’t have any credit history?
Building credit takes time, but there are some things you can do to speed up the process. In this blog post, we’ll share eight tips on how to build credit so you can get approved for a mortgage and buy the home of your dreams.
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Check your credit score
Your credit score is one of the most important factors in qualifying for a mortgage, so it’s important to know where you stand before you start shopping for a home. You can get a free credit report from each of the three major credit reporting agencies once every 12 months at AnnualCreditReport.com. Review your reports carefully to make sure there are no errors, and dispute any inaccuracies you find.
A credit score is a number that represents your creditworthiness — the likelihood that you’ll repay a loan on time. A higher credit score indicates less risk, and therefore, usually results in a lower interest rate on your mortgage. Different lenders have different thresholds for what qualifies as good or excellent credit, but in general, a score of 720 or higher is considered good, and a score of 780 or higher is considered excellent.
If your score is below 580, you may still be able to qualify for an FHA loan with a minimum down payment of 10%. But you will have to pay private mortgage insurance (PMI), which will increase your monthly payments.
If your credit score is between 580 and 669, your loan will be considered “subprime” and you may have to pay significantly higher interest rates or put down a larger down payment. If your Scor is 670 or above, you’ll be in good shape to qualify for most loans with more favorable terms.
Know what’s in your credit report
It’s a good idea to review your credit report before you start house hunting. This way, you’ll know what potential lenders will see when they pull your report. You can get a free copy of your credit report from each of the three major credit bureaus once every 12 months at AnnualCreditReport.com.
When you review your report, look for any mistakes and dispute them if you find any. You should also look for any red flags that could indicate fraud, such as accounts or activity that you don’t recognize. If you find anything suspicious, report it to the credit bureau and the Federal Trade Commission.
Once you know what’s in your credit report, take steps to improve your credit score by paying down debt and making sure you always pay your bills on time. A higher credit score will give you more negotiating power with potential lenders and could help you qualify for a lower interest rate on your mortgage.
Dispute any errors in your credit report
The first step is to check your credit report from all three credit bureaus—Experian, Equifax, and TransUnion—and dispute any errors you find. According to a 2018 study from Northwestern University, about 25% of Americans have an error on at least one of their credit reports.
For example, if you see a collections account that doesn’t belong to you or an incorrect late payment, file a dispute with the credit bureau. If the bureau finds in your favor, the error will be removed from your report, and your score could go up as a result.
Pay your bills on time
One of the most important things you can do to build credit is to pay all your bills on time, every time. That means credit card bills, mortgage payments, car loans – everything. Payment history is one of the largest factors in your credit score, so even one late payment can have a significant impact.
Reduce your credit card balances
One factor that is taken into consideration when your credit score is calculated is your credit utilization rate, which is the ratio of your outstanding balances to your credit limits. To reduce your credit card balances, you can either pay down your balances or request a higher credit limit from your card issuer. Reducing your credit utilization rate can help improve your credit score.
Get a secured credit card
A secured credit card is a great way to build credit because it requires a deposit that acts as your credit limit. This means that if you decide to spend more than you have deposited, you will not be able to do so. This can help you avoid overspending and help you keep your credit utilization low, both of which are good for your credit score. Additionally, many secured credit cards report to the major credit bureaus, so using one can help you build your credit history.
One way to build credit is to become an authorized user on someone else’s credit card. This means that you are allowed to use the credit card, but are not responsible for repaying the debt. The account will show up on your credit report, and if the account is in good standing, it will help to improve your credit score.
Get a small loan
One of the best ways to improve your credit is to get a small loan and repay it on time. This shows that you’re a responsible borrower, and it can help improve your credit score.
If you have trouble qualifying for a traditional loan, you may want to consider a lenders that specialize in loans for people with bad credit. These lenders will be more likely to approve your loan, but they may charge higher interest rates or fees.
Once you’ve gotten a loan, make sure you make your payments on time. You may also want to consider making more than the minimum payment each month to reduce your debt more quickly.
Use a credit-builder loan
Your credit score is one of the most important factor lenders look at when you’re applying for a loan — but what if your score is too low to qualify for a traditional loan? If you’re looking to build credit so you can eventually buy a house, one option you may want to consider is a credit-builder loan.
A credit-builder loan is a type of loan where the money you borrow is deposited into a savings account. As you make your payments, you build up your savings while also improving your credit score. Once you’ve paid off the loan, you’ll have access to the savings account, which can be used for a down payment on a house or for other purposes.
Credit-builder loans are available from some banks and credit unions, and they typically have low interest rates and fees. If you’re looking to improve your credit so you can eventually buy a house, a credit-builder loan may be worth considering.
Use a co-signer
One way to build credit to buy a house is by using a co-signer. This is someone who agrees to be responsible for repaying the loan if you can’t. The co-signer could be a family member, friend, or even your employer.
The co-signer will need to have good credit themselves, and by adding them to your loan, it will help offset any negative information on your credit report. This can be a great way to build credit to buy a house, but it’s important to remember that you are still ultimately responsible for repaying the loan. If you default on the loan, it will damage the credit of both you and your cosigner.