What’s the best way to fix your credit when you want to buy a home? Do you need to go through a credit repair company? What’s wrong with doing it by yourself? Do you even need to worry about paying off old debts to buy a house at all? The following should clear up any questions you may have about credit and buying a home:
Bad Credit Nation
There is still a lot of confusion over what a good or bad credit score is. There is even more misinformation about how individual scores stack up to others. This is another classic case of how statistics and numbers can be twisted. Some measures put the median credit score from late 2014 to early 2015 in the low 700s. Yet, much of the country is still in a mess of foreclosures, and has been for 10 years. Money-Zine says the average score is actually around 630 – almost 100 points less than what we have come to expect. When broken down by state, the average scores are lower. For example; Mississippi has an average credit score of just 604.
How High Does Your Credit Score Need to Be to Buy a House?
Everyone should be shooting for 700 or more on their credit score. However, there are already mortgage loan programs that will give borrowers low and no down payment options with scores of 640. Some might not even require a credit score at all.
In fact, you don’t need a credit score, or even a score above 600 to get many types of mortgage and real estate loans, even in 2015. Low LTV loan, hard money, transactional funding, and commercial real estate loans are all perfect examples. That said, real estate investors don’t even need good credit to make a lot of money. Even when they do have perfect credit, many might want to think twice before using their own personal credit versus business funding and credit. That said, a good score will help you get better rates on all types of things, which frees up more money to invest in real estate.
Good Credit is More Than a Score
Those hoping to buy homes or invest in real estate also need to realize that it is about more than just a number. You could have a great credit score and still get turned down for a loan. You could have a mediocre score and get an even better loan based on other factors. For example; those with new credit – or that have just cleared bankruptcy – might have 700 plus credit scores. But those other factors can kill loan approvals. Some of the other factors lenders look at include:
- Length of credit history
- Number of trade-lines
- Amounts of credit available and in use
- Payment shock
- Debt to income ratios
Every lender and mortgage program is different. Some may require a borrower to have three active accounts that have been open for at least 24 months, with balances of $1,500 or more.
In many cases, the biggest obstacle to good credit scores and loan approvals is just a lack of positive credit – not necessarily negative items on a credit report. If this might be your challenge, try to build up new credit. You may have to get secured credit cards to start with, or maybe you can just request credit line increases with current creditors.
Paying down high credit card balances is the most common challenge to borrowers. Try to get balances under 30% of respective credit limits. However, this can take time to show up on your credit report.
Do I Need a Credit Repair Company?
Credit repair services can help, but they also have a notorious reputation. They have often been accused of looking up borrowers for months or years, and for charging ongoing fees with little difference being made. This certainly isn’t always the case, but it can be very difficult to separate the good from the bad.
In some cases, your attorney may be able to help. If it is a cut and dry case of bad items showing up that shouldn’t be there, then an attorney should be able to get them removed.
Check Your Credit
Obviously the first step towards a home mortgage loan and buying a house is to check your credit. If you don’t know what it looks like, you don’t know if you need to fix it, or what to fix. Talk to a real mortgage broker, have your credit checked, and work with them to create a plan to get from where you are now to in a home.