Cultivating a healthy credit score is key to getting the mortgage rates you want, but we know that’s easier said than done.
The good news is that while some credit challenges may not be your fault, there are a few things you can do about them. Let’s break down what you can control when it comes to building the credit you need to become a homeowner.
Which credit challenges have the biggest impact on my score?
Factors that affect your credit score fall into five categories:
- Payment history
- Amount owed
- Length of credit history
- Credit mix
- New credit
The majority of your credit score is based on your payment history and how much of your credit you use, so these are usually the categories where most borrowers run into credit challenges.
What steps can I take to handle credit challenges?
No matter which credit challenges you’re affected by, there’s no denying how much a low credit score can set you back in your homeownership journey. Some aspects of your score may be beyond your control as an individual, but we rounded up some key steps you can take to get your credit score as healthy as it can be in spite of any external factors.
Check your credit report
You can request your credit report once a year for free from each of the three major credit bureaus (Equifax, Experian, and TransUnion—follow the Federal Trade Commission’s instructions here). Once you receive your report, look for any errors that can be disputed and potentially removed from your record. These could include:
- Incorrect personal information, like your name and address
- Incorrectly listed bankruptcies, foreclosures, and other negative marks on your record
- Accounts that aren’t yours
- Accounts that are yours but aren’t listed in the report
- Duplicate accounts
- Accounts listed as closed that are actually open, or vice versa
- Fraudulent activity
If you find incorrect information on your record, you can dispute the errors with the credit bureau you received the incorrect report from.
Make payments on past due and/or high interest accounts first
Chances are, you won’t be able to pay off all your credit at once (and you shouldn’t—no credit isn’t much better than low credit). For the biggest boost to your credit score, prioritize making payments on accounts that are past due or have a higher interest rate.
Limit hard inquiries
Hard inquiries come from lenders when you apply for a new line of credit or loan. So, if possible, avoid opening new lines of credit if you’re trying to repair the credit you already have (unless your score is low because you don’t have enough credit mix, in which case opening a new credit account could boost your score).
While you’re at it, try to avoid closing lines of credit just before applying for a home loan. It’s a bit surprising, but your credit score can be dinged for closing accounts too. That’s because when you close an account, you reduce the amount of credit available to you. This means the credit you’re using will automatically become a larger percentage of your total available credit
Can I buy a house with a low credit score?
If you had to have a perfect credit score to buy a house, we’d all be renting. While you may have less flexibility than a borrower with a higher credit score, there are a lot of great financing options you can still take advantage of:
- FHA Loans
Backed by the Federal Housing Administration, you could get approved for an FHA loan with a credit score as low as 580. - VA Loans
If you’re a veteran, active-duty servicemember, or eligible surviving spouse, VA loans offer a lot of exclusive advantages including low interest rates and approval with credit scores as low as 580. - USDA Loans
These loan types can be used for eligible rural properties by low to moderate-income households. They may be geographically limiting, but there are no fixed credit requirements for USDA loans. The limit will be set by your lender.
If possible, you should aim to make a higher down payment on your mortgage to offset your credit score. Another option is to get a cosigner for your mortgage to provide your lender with added security.
If you’re a first-time home buyer, you could also qualify for financial assistance from the Department of Housing and Urban Development. You can find more information on how to qualify here.
What will homeownership look like for me while I’m dealing with credit challenges?
Long (but hopefully not too long) story short, a low credit score isn’t the end of the line when it comes to buying a house. A good lender will look at the full picture and work with you to build a home loan that meets you where you are, and sets you up to grow your finances for the next step in your homeownership journey. When you’re ready to explore your options, we’re here to help.
Some credit challenges may be out of your control, but there are still steps you can take to cultivate your credit score and qualify for the home financing you deserve.
