How to Fix Your Credit to Buy a Home

Don't be discouraged, you can get your score up! A good credit score means you'll get a great mortgage. A bad credit score means you need to do some credit repair, not that you won't be able to buy a home. Credit scores, also called FICO scores, range from 300 to 850. For an FHA loan you have to have 580 fico for 3.5% Down, 620 or better for Assistance Programs, 550 or better for with 10% Down. For Conventional you need to be much higher depending on the down payment as well. You can do it yourself or you can hire someone to do it for you.

**If you have absolutely NO CREDIT and have no negative items, you can qualify right away with 3 alternative forms of credit! One has to be substantial like your rent history, but the other two can be anything from cable or utility bills to gym memberships or magazine subscriptions. They just have to have a significant history length and have been paid on time.

First Steps:

If you'd like referrals for companies that some of my clients have been successful with please let me know. If you're going to repair your credit on your own, the first step is to get a copy of your credit reports. This is free once a year and will provide you with FICO scores. Follow this link AnnualCreditReport.com, it is the government approved credit report source. For more information on FICO scores check the FICO Score Factors Guide

Next, you need to visit all three credit bureau dispute centers. You create a login and they will show you all of the items on your report. You can dispute negative information online. Here are the links to the 3 dispute centers:

http://www.experian.com/disputes/main.html

http://www.transunion.com/personal-credit/credit-disputes/credit-disputes.page

https://www.ai.equifax.com/CreditInvestigation/

What to do with negative items:

Collections/Judgments:

These need to be removed from your credit report. If you have unpaid collections or judgments that you are responsible for, contact the creditor directly to negotiate a short pay. I usually shoot for 30-40 cents on the dollar. All collections and judgments need to be settled-it doesn't matter if you pay them less than they originally were requesting. You need to get a letter from the creditor stating that they accept your short pay off and any other terms you negotiate prior to you paying them, again try to get them to put in writing the debit will be removed. Upon receiving final payment request another letter stating that the account is paid in full/settled and to be removed. DO NOT tell them you are trying to purchase a home, you'll lose negotiating power. If you are not able to get in writing the debt is to be removed, you will have to wait 30/45 days from final payment to see what has been reported, a zero balance will not put the underwriters at ease. From here you will need to dispute the item with all 3 agencies which can take up to another 45 days. If you have settled and paid the agreed upon balance, the debit should be removed either by the reporting agencies due to no response from the collector or from the collector agreeing you have satisfied the debit. If you have collections or judgments that are not yours, dispute them and be ready to have proof to back up your dispute. You may have to send the creditor hard proof that you don't owe the debt.

REMEMBER: When you call them you want to see if they're willing to take a settlement. If so you'll want to get a settlement letter outlining the terms of the payment agreement. The goal is to get them to say they will actually remove the item from your report, even if you have to pay them a little more. If they just won't you'll want something that says they'll report it as paid in full and paid as agreed. All of them are different so just give it a try :)

Loans & Credit Cards:

Dispute any items that are reported incorrectly. If there are late payments incorrectly reported, accounts not showing paid in full, or items that are past their scheduled "removal date", dispute them. A lot of times the creditors would rather just remove things than spend time/money to research them-it's worth a shot! Don't ever commit any form of fraud when disputing legitimate credit issues, do what you can to clean things up and be accountable for the items you truly are responsible for and it will all work out! If you have any current loans or credit cards, try to pay them down to less than 100% of the credit line maximum if possible, this helps your score go up.

If you don't have any or at least 3 forms of credit you can apply for pre-paid credit cards. I've been told to use it monthly but NOT to exceed 30% of the credit limit, then pay it off or at least below 10% of the credit limit. Make your payments on time and don't over use the cards. Taking out new credit lines will ding your score temporarily but if you manage them well your score will increase more quickly.

Next Steps:

Your credit score readjusts around every month. If you get things resolved prior to that date, it will change. You don't want to keep pulling your credit to check your score though-each pull deducts from your FICO score. You may want to sign up with a credit monitoring system if it's going to take a while to get things straightened out. Use one of the three major credit bureaus, not a third party that may be less expensive. This way you can see your report monthly without hitting your FICO score. If there are only a few items to correct or pay-down to get the FICO score you are looking for, a monitoring system may not be necessary.

Once you're getting close to your Fico goal we'll get you connected with a lender so they can begin the pre-approval process. Pre-Approval=Home Ownership :)

Other tricks:

Personal Information:

When you're working on your reports make sure all of your personal information is correct. You want the current employer, income, address, phone numbers, etc. to reflect. Delete anything that doesn't belong to you. The debt/income ratio that the bureaus use is usually incorrect but it still affects your FICO score.

We are always here to help if you have questions, feel free to reach out. Once we have your QUESTIONNAIRE send you to a lender for a plan if you'd like and we'll keep in contact to help you along the way. We look forward to seeing you become a homeowner soon! Don't lose your motivation!

Other Resources:

Check out this LendEDU resource that covers how to dispute a mistake on a credit report.