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Steps to Raise Your Credit Score to Get the Home You Want

Tk Angel Masse

Attention to detail, prompt communication, commitment to integrity, decisions based on data, a wealth of resources, and her heart for people have been...

Attention to detail, prompt communication, commitment to integrity, decisions based on data, a wealth of resources, and her heart for people have been...

Aug 3 14 minutes read

So you want to buy a home but your credit score is holding you back? Don't worry, you're not alone. A lot of people find themselves in the same situation. Even if you have the required 620 credit score to qualify for an FHA mortgage loan, having "good credit" of 740 and above, which comes with lower interest rates and better terms.  But regardless of where your credit score is now, don't despair – there are ways to raise your credit score and get the home you want. In this blog post, we will discuss the steps on how to do just that!

Step #1: Get copies of your credit reports and analyze it to know where you stand.

When applying for a mortgage loan, the first thing you should do as a homebuyer is to know where you stand in terms of credit. To have a clear idea of your status, you must are allowed one free credit report a year from the three major reporting agencies (Experian, Equifax, and TransUnion).  You have three credit scores, and the mortgage lenders don't favor the three credit bureaus in any particular order.  Lenders base their decisions and home loan terms from the middle score of the three you have, and if applying with a co-applicant, the higher credit score is disregarded, as the lower-middle score is taken into account.

Having your complete credit file and copies of all three reports allows you to do an in-depth comparison, as some creditors only send reports, such as late payments, payment history, a new credit line, old credit accounts, etc. to just one or two of the agencies. 

Ideally, what the mortgage lenders should find is a good credit history. a good FICO score with a strong credit mix, a low credit utilization ratio, and very few if any late or missed payments. Add that to the requirement that you should have 2 years of solid income history and enough cash to cover your down payment and closing costs, the pressure can pile up, making the process of applying for a mortgage completely daunting.  However, you’re not alone (we've got your back!), and your journey, even if it's a very long one, will be worth it in the end.

Now that you have analyzed your credit history, you can now work on improving your credit scores by addressing the problem areas preventing you from a good credit score.

Step #2: Dispute any errors on your credit report.

When you get a hold of your credit report, it is not unlikely for it to contain errors. You may find some inaccurate or incomplete items, as well as some that are out of date, or unverifiable. This kind of misinformation can be detrimental to your credit rating and to your conventional mortgage application, so the sooner you can dispute these items, a better credit score can be the result. Gather supporting documents that can prove your case, and request to have the mistake either removed or corrected in your report for a possible score improvement over a few months.  With some diligence and determination, your credit score improves every time a dispute is accepted.  It is also very important to follow the correct sequence of steps in the right order:

First, thoroughly check and review your credit report for errors: 

  • Credit Report Errors You Can Dispute You can dispute credit report items causing a lower credit score that are inaccurate, incomplete, out of date or that which cannot be verified. It can vary from minor errors, such as a misspelled name, an old address, birth date or your social security number. However, other errors in your credit history could be detrimental to your credit score and could potentially cost you tens of thousands of dollars, such as inaccurate payment history, a false credit mix, or credit lines that do not belong to you. Negative items should only appear on your credit report for seven years, except bankruptcy, which can remain for ten. Any negative entries you have that are older than seven years, you can dispute. Other specific credit history items you can dispute include, but may not be limited to, late payments that were actually on time, accounts that aren’t yours, inaccurate credit limit, total credit limit, loan amounts, or account balances, inaccurate creditor or credit card company name, and an inaccurate account status.
  • Two Options for Disputing Credit Report Information: Your first option is with the three major credit bureaus, Equifax, Experian, and TransUnion. The second option is directly with the creditor or business who provided the information to the credit bureaus, also known as the information provider, such as credit card accounts, phone and utility bills, rent payments that were late, secured credit card companies, bill payments due to medical events, or any type of monthly bills that were missed, etc. You may dispute directly with the information provider when the credit bureaus respond that the error you disputed was verified by the creditor.

Second, place your credit card dispute

Here are the 3 ways to place your credit line, credit account, and payment history disputes. Every successful dispute has the potential to improve your credit:

  1. Online - Disputing errors online is probably the most convenient way of disputing. You dispute inaccurate information directly on each credit bureau website. Each credit bureau provides easy to upload, fax, or email supporting documentation to your dispute. You are also able check on the status of your disputes by providing your confirmation number; however, you can only get the result of your dispute online and not by mail. 
  2. Mail - Placing your dispute by mail definitely takes more time, but doing it by mail provides you with the paper trail you’ll need if the credit bureau does not respond in a timely manner. You must write a dispute letter explaining the reason why your credit report is inaccurate and that the information that should be removed from your credit history. You will also need to include proof of the error and other supporting documentation (not the original copies). When sending the letter and your supporting documentation, send the letter via certified mail with return receipt requested so you’ll have proof of when the dispute was made and when the creditor or credit bureau receives it.
  3. Phone - To dispute by phone, you need to have ordered a copy of your credit history report within the past month that contains your credit report number. However, you’ll still have to mail in any supporting documentation or the proof that validates your dispute.

Third, Wait for the response of the credit bureau or the creditor to your credit report dispute

Both information providers and credit bureaus have the same amount of time to investigate a dispute, which is 30 to 45 days from the date they received it. Once the investigation is finalized, the credit bureau or reporting agency should provide you with the results and a free copy of your credit report if there have been updates. If they don’t respond in 30 to 45 days, you have the right to sue in Federal court for up to $1,000. Bonus Tip: Make sure your disputes are legitimate disputes and that you have provided enough supporting documentation to investigate it. Do not do anything to make the credit bureaus or reporting agencies think your report of inaccuracy is frivolous. Don’t dispute everything on your credit report at once and don't disputing an item multiple times. The credit bureau or the creditor can determine that your dispute is frivolous if you don’t give them enough information to investigate the dispute. They also have every right to reject it.

Step #3: Pay your bills on time, but take note the credit accounts that will actually boost your credit score.

Paying your bills on time is always the best thing to do, and it definitely helps in getting you an excellent credit score. However, not all bills will have the same positive impact. There are certain on-time payments that won’t contribute to good credit no matter how diligent you are in paying them. These bills include rent, utilities, cable, internet, and cell phone bills. Turns out, paying these bills on time won’t land you a higher score – but missing payment result in bad credit and low credit score. For example, unpaid cable or internet bills that are sent to collections will be put down on record, so it will serve you best to still make on-time payments for any bill. The ones that directly help you build a good credit score are credit accounts, student loan payments, mortgage payments, and car payments – so be sure to that you’re able to make timely payments for these if you’re looking to improve your credit score.

Step #4: Eliminate credit card balances.

If you have small balances on several credit accounts, you might want to pay these off. Having your FICO score polluted with a lot of balances with lots of credit card bills will bring down your credit score and potentially turn off lenders. Your credit score is affected by how many credit card balances, you carry so it’s best to eliminate nuisance balances from separate cards and just choose one or two go-to credit cards that you can use every time you have to make purchases.

Step #5: Avoid incurring any new debt or new credit.

For the lender to see that you are financially stable, do not take on a new credit card account, new debt, new account, new credit lines, new credit accounts, or max your current credit limits until you have purchased your home.  Credit inquiries greatly affect your credit score, so avoid applying for a credit card and making credit-based transactions the same time you’re applying for a mortgage loan.

Step #6: Reduce your debt-to-income ratio.

Your debt-to-income ratio indicates the percentage of the amount of monthly debt you have a percentage of your monthly income before taxes. A low debt-to-income ratio means that your income isn’t spent on paying off a lot of debt, whereas a high debt-to-income ratio indicates that a large percentage of your income is spent on your monthly debt.  If you have a high income and a healthy down payment amount, a lender may not view your mortgage application as a risk.  However, if your monthly fixed expenses – such as rent payment, auto payment, and other bill payments – are also exceptionally high, your income may not help you get a better interest rate on your mortgage. To qualify for a good mortgage loan with the best interest rate, it's best that your total debt-to-income ratio is 40% or lower. Otherwise, the mortgage lenders may have some doubts regarding your ability to make mortgage payments on time.  Similarly, credit utilization and your credit utilization ratio is another factor that differentiates a good credit score from someone who may have bad credit.  This takes into account the amount of credit card debt you have versus the amount of overall credit you have available. The more credit, the better, and a credit limit increase should lower your overall credit utilization.  Being added as an authorized user on another person's account can also help with credit utilization.

Step #7: Leave good debt on your report.

You may think that leaving a record of debt on your credit report might hurt your chances of getting a good mortgage. When your report shows that you’ve handled your debt well by paying as agreed – that’s a good thing. The more history of good debt you have, the more it helps improve your score.

So, if you’ve had a car loan that’s been paid off or other debt that was correctly settled without the need to involve collection agencies, don’t be in a rush to have these records removed. The higher the average age of the accounts on your credit reports are, the better it reflects on our credit history.

The Key Takeaway:

Understanding the steps to raise your credit score to get the home you want may seem overwhelming, and proving to mortgage lenders that you can handle the responsibility of homeownership may seem like an impossible mountain to climb.  Instead of trying to figure it out on your own, your best next step is to establish where you are starting and get help to reach the finish line.  Buying a home takes a team - a team with a good real estate agent, mortgage lender, and if necessary, a good credit coach.  Working with Your Philly Living is a one-stop shop for all three, not to mention the team of experts that you'll need behind you once we find the home you love and go under contract for it and bring you successfully to the closing table. After eight years of experiences and helping hundreds of families on their path to homeownership, we have the resources you need for the outcomes you want, and we take you every step of the way.  Schedule a Buyer Consultation with our team by clicking here. We've got you!!

While we tried to point out every scenario we could think of...

Your specific credit situation may not have been mentioned. 

We know everyone has different concerns and personal circumstances.

If you’re still unsure or are overwhelmed about what the home buying process will look like for you, we’re ready to walk you through every step of the journey!

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