Are you at the point where you wonder if you should give up? You can picture yourself moving into a new home. You know how great that would be for your family. But you have credit problems, and they’re like a huge wall standing in your way. You’re not sure if there’s a way to fix bad credit and get a home loan, or if you’ll just have to keep renting for the foreseeable future.

Maybe you talked to a lender and they turned you down. You provided all the paperwork and explained why your credit is in the shape it’s in. You’ve made some mistakes, but you’ve also taken some steps to make things right. It just didn’t seem like enough.

You don’t have to give up on your dreams. Even if your credit is in bad shape now, we’re here to help. And repairing your credit doesn’t have to take years, either. It takes hard work and dedication, but it’s possible for anyone to fix bad credit and get a home loan.

Minimum Credit Score to Get a Home Loan

Different mortgage types have different minimum credit scores to qualify. Often an FHA loan has the lowest credit score requirements. For most types of mortgages, you’ll need a minimum credit score of 620 or more. For more on that, see our article What Credit Score Do You Need to Qualify for a Mortgage.

If you’re already there, you might not need to fix bad credit to get a home loan. However, if you’re not quite to 620 right now or you’re not sure if your credit meets lending requirements, keep reading.

Get Your Free Credit Report

Your credit score is one of the biggest determining factors in whether you get approved or denied for a home loan. Your credit score is a three-digit number, usually between 300 and 850. It’s based on how you pay back the money you borrow and how many accounts you have done that for over time. It doesn’t have anything to do with things like your race, gender, whether or not you’re married or what country you came from.

There are three main credit bureaus that gather and report your information. Lenders look to Equifax, Experian and TransUnion to calculate and provide your score. You’re entitled to one free credit report a year from each. According to the Federal Trade Commission, the authorized place to order those free reports online is annualcreditreport.com.

There’s a difference between your credit report and your credit score. The score is just that three-digit number. Your report contains all the good and bad things lenders and lien holders say about your payment history. Not all resources offering a free report actually give you the three-digit number.

When you request a report, be sure you read the fine print. Some services offer a “free” credit report or credit score if you sign up for monitoring. That may or may not be the best option for you right now. Accessing and downloading your credit reports usually takes less than half an hour.

Why Your Credit Score Might Differ

Not all lenders report to all credit bureaus. For example, if you do a great job making your car payment every month, your lender may report that to Equifax and TransUnion, but not Experian. Or, if you haven’t made a credit card payment in a while, that company may have reported your debt to Experian, but not the other two.

That’s just one reason your credit score can vary between credit bureaus and reports. It’s not that one score is more “right” than the other. They should all be around the same range. In other words, if Experian reports a score of 492 and TransUnion says you’re at 650, find the reason they’re so different and address it. If you’re wanting to fix your credit to get a home loan, you can pick one to monitor over a period of time.

VantageScore vs. FICO

The Fair Isaac Corporation introduced the FICO scoring system in 1989. Since then, some people use “FICO score” and “credit score” interchangeably. They’re not the same thing. FICO is the brand name for a computation system.

There are dozens of different FICO scores. Some of them are even industry-specific (for example, the auto industry might use a different FICO score to process your car loan than the department store does to give you store credit). Plus, FICO creates multiple editions of each scoring model, almost like computer software providers issue updates. Lenders can choose to update or stick with what they’re currently using, so there’s plenty of room for variation.

Your FICO score works with information pulled from Experian, Equifax and TransUnion. Your score depends on the information in consumer credit reports.

In the last ten years or so, newcomer VantageScore offered a new scoring model. Both FICO and VantageScore use basically the same criteria to give a three digit number.

The main difference between the two is how they generate their scoring model. VantageScore only requires one month of credit history, where FICO requires six. Late payments, credit inquiries and low-balance collections influence both. The bottom line is, there’s not a big difference. Try not to worry too much about a few points discrepancy. Instead, let’s look at what’s in your credit report itself.

Understanding Your Credit Report

Once you get a copy of your credit report, focus on these five areas:

  • Payment History
  • Length of Credit
  • Types of Credit
  • Credit Usage
  • Recent Inquiries

Plan to spend at least a few hours reviewing your credit report for errors. There’s more involved than just your credit cards. Let’s break down what you should look for.

Your Payment History

This part of your credit report refers to whether or not you pay on or before the due date. This might be the most important component for your credit score. Paying back credit card loans and balances on time is the best way to keep your credit score within a healthy range.

Your payment history is around 35 percent of your overall credit score. So what goes into your payment history? Several things.

  • Payment information on your credit cards, retail accounts, previous home mortgage loans and installment loans
  • Any bankruptcies, judgments, some lawsuits or liens, collection items or delinquencies
  • How long it’s been since your payment became overdue or delinquent
  • How much you still owe on delinquent accounts or items in collections
  • How many past due items you have on your credit report altogether
  • How many accounts you’re paying by the due date

If you’re 30 days late on a credit card or loan, it could drop your credit score by over 100 points. Late payments stay on your credit report for years, but that doesn’t mean you can’t get a home loan. Get back on track as soon as possible. The farther you get away from the delinquency, the less it will impact your overall credit score.

Past Due or Delinquent?

If you forget to make a payment until a few days after your due date, your account is past due. As it applies to credit, lenders don’t typically report an account as delinquent until 30 days or more after your due date. At that point, your card issuer will probably start trying to contact you about paying your bill. Sometimes creditors will work with you in the early stages to help get your account current again.

At 60 days, most credit issuers report you as delinquent to credit reporting agencies. They may also report you once you’ve missed two consecutive payments.

Length of Credit

This part of your credit report has to do with how long you’ve had active, open credit accounts. It counts for about 15 percent of your score.

Types of Credit

It’s good to have a variety of different types of credit. Lenders like to see you received credit for a car loan, major credit card, student loan and/or furniture purchase, and you paid them all on time. Diversity helps your credit score, and it counts for about 10 percent.

Don’t rush out and borrow money if you’re trying to fix bad credit and get a home loan. However, if you already have several different types of credit, that helps.

Credit Inquiries

When someone “runs” your credit, that can hurt your score. A hard inquiry happens when a lender requests our credit for the purpose of lending you money or increasing the amount you can borrow.

It hurts your score because if you’re shopping for a loan, lenders feel you might be about to take on new debt that makes you less likely to pay your current obligations.

A hard inquiry stays on your credit record for up to two years. Credit inquiries make up about 10 percent of the total.

However, not all inquiries hurt your credit scores. Sometimes employers or insurance companies check your credit to learn more about you, not to give you a loan. Those are called soft credit inquiries. If you do have hard inquiries you didn’t authorize, it’s possible to dispute those with that creditor.

Credit Usage

Your debt-to-credit utilization ratio is another biggie, making up around 30 percent of your score. Your credit usage is how much debt you’ve built up over all divided by the credit limit on all your accounts. Experts say you shouldn’t borrow more than 30 percent of what you have available across the board. Maxing out accounts causes your scores to fall.

Realize Bad Credit Is Common

If you see a number of problems on your credit report, don’t beat yourself up over it. A recent FICO report shows there are a lot of people in the same situation. More than 68 million Americans have what’s considered bad credit (scores of 599 or less). Experian says 21.2 percent of Americans have what they call deep subprime credit scores, the worst possible credit category.

Texas is one of the top 10 states with the lowest VantageScores. The average Texan has 3.06 credit cards and an average credit card balance of $6,902. If you’re struggling to fix bad credit and get a home loan, start building better habits now. Your brighter future is right around the corner.

Correcting Errors

The biggest benefit to obtaining and examining your credit report is sometimes it contains wrong information. Your credit report might contain untrue items, and if you can get them removed, your score will improve.

A Federal Trade Commission report found 21 percent of Americans, more than one in five found an error on their credit report. Of those, 5.2 percent said the error was so serious it lowered their score enough to impact interest rates or ability to get a loan.

Go over your credit report and if you find something wrong, contact the creditor who reported it. Before you call or write, gather the evidence you have like cashed checks, receipts or online transaction confirmation numbers. You can also contact Equifax, Experian and TransUnion to dispute the incorrect information and request them to remove it.

Depending on how many errors you need to correct, drafting dispute letters can take anywhere from a few hours to a week or so. Once credit bureaus remove the error, you should see your score improve in as little as three months.

Pay Down Debt

Since credit utilization is such a large portion of your score, improving that ratio is one of the most achievable ways to fix bad credit and get a home loan. Use cash you have on hand to pay accounts to below 30 percent of the available balance, and you should see a positive impact in as little as a month.

If you don’t have any extra cash, have a garage sale. Work a second job for a few months. Cancel subscriptions you don’t need. Make major sacrifices for a short time so you can achieve your dreams.

Make sure before you use all your cash you have enough to make current payments. If you’re less than 30 days late on a bill, make that one a top priority, since creditors don’t usually report until after the 30-day mark.

Open a New Credit Card Account

This seems counter-intuitive, but for most people, it helps. Opening a new credit card account increases your total outstanding credit line. It’s a plus, but only if you don’t charge a lot of money against it. It also helps with credit diversity. You’ll see the benefit in just a few weeks.

Become an Authorized User

You can benefit from someone else’s good habits if they’re willing to make you an authorized user on their account. If you have a spouse or family member with a good payment history, ask if they’ll make you an authorized user for one of their accounts. It could give your credit score an immediate boost.

Just be careful who you ask. If you link your credit to someone else’s and they fall into financial trouble, it could hurt your credit too.

Save a Larger Down Payment

It’s easier to qualify for a home loan when you have a large chunk of money to put down. Think of things from the lender’s perspective. If you are unable to pay your mortgage, they’ll have to foreclose. If they foreclose, they own your home, and will need to re-sell it to collect the amount they loaned you. The real estate market isn’t always predictable. They may not be able to sell the house for the amount you financed.

However, if you pay a large down payment, you already have equity in the home. If you default, they might even be able to make money on the sale.

Having a larger down payment sometimes qualifies you for a lower interest rate. If you have enough, you might also be able to avoid paying private mortgage insurance (see Phrases to Know When You’re Getting a Home Loan).

At WestWind Homes, when buyers complete our Home Buyer’s Club program, we can help with your down payment. After you finish, we’ll give you up to $1,000 toward your down payment on a new WestWind Home.

How Long Does it Take to Fix Bad Credit?

When people ask how long it takes to fix bad credit and get a home loan, we say the answer depends on them. The time frame has to do with what their credit problems are and how committed they are to the credit repair process.

When individuals are serious about catching up on past due bills, disputing credit card errors and using credit responsibly, they’re usually surprised by how quickly they see improvement. People hear bad credit can follow you for years, and it is true that some issues have a lasting impact.

However, it doesn’t have to keep you from buying a home for that long. Our Home Buyer’s Club program helps Texans move into a new home in as little as 90 days. The best way to know how long it will take for you is to meet with a home advisor. We’ll help you get your credit in shape, then walk you through the mortgage application process.

We’ll Help Fix Bad Credit and Get a Home Loan

It sounds like a lot of steps and it is. But you don’t have to go it alone. Let us guide you to the most effective way to fix bad credit and get a home loan.

Imagine if three months from now you were moving into a home of your own. We can help you get there. Enroll in the Home Buyer’s Club today to get healthy credit, a home loan and up to $1,000 toward your down payment. Then, you get to pick out and move into a new home in a vibrant community. Schedule your free credit consultation today.

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