You can still manage to buy a house even with bad credit, but you'll have to jump through hoops and spend lots of money to get there. On the other hand, the process will be quite easy when you have an excellent credit score. Even when you are credit is fair, pushing it up by several points can save thousands of dollars in the purchase.
Therefore, before sending that mortgage application make sure you have an excellent credit score. It isn't a magic wand you wave around to get there but rather recognizing your financial weaknesses and fixing them to improve your credit score. There are several ways you can boost your credit score before buying a home and they include:
Dispute errors on your credit report
Order your credit report and look for any mistakes. If you note any inconsistencies or mistakes, no matter how minor, you need to dispute such. One in every 5 consumers will have an error in their credit report which means you cannot improve your credit score when you keep ignoring your credit report.
Also, ensure you have ordered your credit reports from all the three major credit bureaus and review them for mistakes. Each credit bureau works independently in collecting and reporting credit information. Thus, getting your credit report from just one of them will not give you the whole picture as far as your credit score and history goes. Mistakes such as duplicate entries, credit lines you didn't apply for, incorrect addresses or names and incorrect account status are quite common. They also do a lot of damage to your credit score hence the need to dispute them immediately.
Pay down your debt
After updating your credit report and getting all errors removed you should move on to reduce your debt. Your debt-to-income ratio matters a lot when lenders are reviewing your mortgage application. The ratio determines how much income you have to spend on paying back debts. The more debt you pay off the better your debt-to-income ratio. The DTI will not have a direct effect on your credit score but paying down any outstanding debt will. The credit utilization ratio will make up 30% of your FICO score.
Apply for a credit limit increase
You can instantly improve your credit score by getting a credit limit increase. It won't affect your DTI but it does lower your credit utilization. It's a simple process and your request may even be approved immediately. However, some credit card companies will have to run a credit check before approving the credit limit increase. A hard inquiry can lower your credit score but if done just once the effect will be negligible. However, ensure your credit has not been going downward since you opened the credit card account. In such a case, the limit might even be lowered.
Be an authorized user on someone else's credit card
You can ask to be an authorized user on someone else's credit card in which case your credit score will improve immediately. However, this only applies if the other person has a good credit history. Otherwise, you'll end up hurting your credit score even further. You can ask a member of your family or even a close friend.
Remember that whatever anyone linked to the credit card account does is reported on both people's credit reports. Therefore, only ask such favor from people who are financially responsible. The better part of this arrangement is that you don't even have to use the credit card or even get information on the account. Whatever the primary account holder does will automatically transfer to you as well.
Get a credit-builder loan
To diversify your credit mix you can apply for a credit-builder loan. The types of credit you have will make up 15% of your FICO score. If you have several you can bump up your credit score. These credit-builder loans can be as low as $1,000. However, they are different from the traditional loans in that the lender will just deposit the amount in your locked savings account. You won't be able to access this loan for 6-24 months and in this time you are required to pay off the loan. After you have cleared the loan, the accumulated money will be returned to you in full. The best part is that a credit inquiry won't be necessary to get the loan. Just an evaluation of your banking history will be enough.
Request for a rapid rescore
After doing your best to repair your credit you want to ensure your efforts are reflected in your credit history. That's why you should request for a rapid rescore. This means your credit reports will be updated quickly(it will take less than a week). The new score will be favorable if your efforts have been successful. It is a much quicker way to see a positive change on your credit score as opposed to waiting for months to have the changes made. Not all lenders offer this option but there is no harm in asking.
Get a secured credit card
It is not easy to get the average credit card when your credit score is low but you can go for a secured credit card instead. In this case, you make a deposit of $200 or more with the issuing bank. The amount deposited will typically be equal to your credit limit. Ensure you pay off the balance in full every month. This builds your credit and you won't be paying any interest on the same. However, ensure the credit card company reports to all three credit bureaus.
Conclusion
When you start saving for a house deposit you should also start fixing your credit score. Getting started a year before the due date or earlier will give you plenty of time to fix your credit so that you can get favorable terms when you apply for a mortgage loan. A good credit score will also help in other purchases or loan applications besides buying a house.