How to Fix Bad Credit Before Applying for a Home Loan

If you are trying to buy a home, the first thing you need to do is look up your credit score. There are three credit reporting bureaus, TransUnion, Experian, and Equifax. You are entitled to one free credit report from each of the three major credit reporting bureaus each year. Before applying for a home loan, you should get reports from each of the reporting agencies, so that you know what your credit score is.

What is a FICO credit score?

All three of the reporting agencies use the same software, developed by the Fair Isaac Corporation (FICO). That is why credit scores are known as FICO scores.

What is a good credit score?

Credit scores range from 300 to 850. The higher the score, the better the credit. However, the range is not equally distributed and the average credit score in the U.S., which is currently 710, is not the midpoint between 300 and 850. Scores are usually divided into groups: poor (300-579); fair (580-669); good (670-739); very good (740-800); and excellent (801 and up).

Can I get a mortgage without good credit?

Yes, you can get a mortgage without good credit and even without an established credit history. There are programs that exist to help first-time buyers, at risk buyers, or buyers in other special groups like military veterans. However, the better your credit, the more likely you are to qualify for a mortgage AND for a good interest rate.

How do I build good credit?

The only way to build your credit is to apply for, and use, credit. However, the easiest way to fall into financial troubles is to rely on credit to pay for things. You want to take a cash-only approach to spending, which means only buying most things when you have enough cash to pay for them. However, you also want to show a history of responsible payments.

How can paying my bills improve my credit?

One way to responsibly build credit is to use a credit card to pay your regularly monthly bills, such as your utilities, car insurance, or cell phone bill. Pay the balance on that card in full each month. You will be spending the same amount as you would if you were paying in cash but getting the benefit of using credit.

How can car purchases improve my credit?

Many people buy more car than they can really afford because of leases or super-long-term car notes. Instead of doing that, limit your car choices to vehicles you can afford and make moderate payments. Even if you have the cash to purchase the vehicle outright, financing a vehicle can add diversity to your credit score.

Can a family member or friend help my credit score?

Absolutely. If you have a friend or family member with good credit who is willing to name you as an authorized user on an established credit account, you get the benefit of that credit history in your credit report. Friends or family members may also be able to help you by co-signing on smaller loans, such as auto loans or other installment loans.