If you’re looking to buy a house, but your credit isn’t in good shape, don’t despair. It’s never too late to work on your credit and make it more presentable for lenders. It might be discouraging to look at your credit score, but you could see some major improvements if you put in the work. Here are a few ways you can improve your credit score to qualify for a home loan.
1. Pay Off Delinquent Accounts
One of the easiest ways to boost your credit score is to pay off any delinquent accounts, charge-offs, bills in collections and judgments. You might worry that you don’t have the capital upfront to do this. However, you don’t have to worry. Pay off each account one at a time. If you don’t have the right amount of funds to pay them in full, set up a payment arrangement with the creditors. This will help you make more manageable payments towards your balances. After a while, you’ll have everything paid off. While this may be a slow way to do it, you don’t have to wait until everything is paid off to apply for a mortgage. You can show lenders that you’ve been slowly paying off your debt. As a result, they’ll see that you’re serious about getting a home loan and paying off your debts.
2. Reduce Your Debt-to-Income Ratio
Many lenders will look at your debt-to-income ratio to determine your eligibility for a home buying program. If your income is lower than the amount of debt that you have, lenders may see you as a liability and as someone who won’t be reliable in making monthly payments on a home. To fix this problem, you can reduce your debt to income ratio by decreasing your debt or increasing your income. To decrease your debt, you can pay off delinquent accounts one at a time. You can pay the lowest amount of debt first and slowly work your way up to the highest amount of debt until everything is paid off. This is called the debt snowball method, which makes debt payments more manageable by breaking them down into small chunks.
You can also increase your income by getting a side hustle, picking up more hours at your current job or getting a second job. By increasing your income, you can reduce your debt-to-income ratio.
3. Avoid Incurring New Debt
Incurring new debt is one of the worst things you can do when trying to qualify for a home loan. Lenders will look at you as a risk and will determine that you’re not responsible financially. This is a major problem because lenders want to make sure you’re able to keep up with your home’s monthly payments. If you’re incurring new debt and aren’t even paying on your current debt, they may automatically reject your application and move on to the next applicant.
4. Dispute Inaccurate Information
Many people have become victims of identity theft. When someone steals your identity, they might open up new accounts in your name. For example, they might rent an apartment or lease a car. If they become behind on payments, this can reflect badly on your credit score. However, you don’t have to be a victim of someone else’s wrongdoing. You can dispute inaccurate information on your credit report. Notify all the credit bureaus that someone has stolen your identity and that you’re working diligently to get to the bottom of the situation. Even if the credit bureaus don’t remove the negative account from your credit report, they’ll put a note on your report that you’ve been a victim of identity theft.
Qualifying for a home loan won’t be impossible if you have bad credit. However, it will take a lot of work to get your score where it needs to be. But once you do, you’ll be able to get the home of your dreams.