For millions of families, the American dream of owning a home has been hijacked by the American nightmare — bad credit. What’s worse is that many people in this situation see only see two options — 1) accept their fate and give up on the dream completely, or 2) use their subprime credit score, as is, to take out a high-interest mortgage that ends up costing more than they can practically afford.
Fortunately, there is a third option for homebuyers with bad credit — a combination of initiative and patience to improve your credit before buying a home.
Find Out Your Credit Score
You may already have some idea of where your credit score stands, but keep in mind that it fluctuates constantly. As you may already know, there are a number of different credit scores out there, from the official FICO score to the Vantage scores used by the three major credit bureaus.
It’s a good idea to track each of these.
You’ll have to pay for your FICO score at MyFICO.com. But the process of cleaning up your credit could be a lengthy one and you don’t want to have to pay to see your FICO score every time you want to check in on your progress. For that, you can rely on your Vantage scores, all of which can be accessed for free.
- Experian VantageScore through Credit.com and CreditSesame.com
- Equifax VantageScore through Quizzle.com
- TransUnion VantageScore through CreditKarma.com
While your Vantage scores will not be the same as your FICO score, they should at least reflect improvements, giving you some indication that your efforts are paying off.
In other words, your Vantage scores are ones you can easily track for free on a monthly basis, while you may just want to check your FICO score every 3 to 6 months.
Obtain All Three Credit Reports
Again, you may have some idea of what’s on your credit reports, but it’s time to go through them with a fine-tooth comb.
If it’s been more than a year since you’ve seen them, you are entitled to a free copy from each of the major credit bureaus — Experian, Equifax, and TransUnion. And yes, you need all three, as there could be things on one credit report that aren’t on another.
Spend Six Months Working to Improve Your Credit Score
Once you have your credit reports, mark erroneous or negative items. Then dispute these listings with the appropriate credit bureau.
This can be an especially effective tactic for old credit card debt.
The older it is, the more times your old credit card debt has probably been sold to a new debt collector. But when the debt changes hands, documentation supporting your responsibility for the debt often doesn’t get included in the transfer.
This means that, through the debt validation process, collectors may not be able to prove you owe the debt, in which case it must be removed from your credit reports.
Beyond cleaning up negative listings already on your credit reports, be sure to:
- Pay all your bills on time, every time.
- Rework your budget to pay down any existing debt.
- Only charge as much to your credit cards as you can afford to pay off within 30 days.
- Avoid using more than 30 percent of your available credit.
- Avoid applying for additional lines of credit.
Of course, if you don’t already have active credit cards, it may be in your best interest to apply for a secured credit card. Just be sure of two things:
- It is one that reports to the credit bureaus, and
- You only charge as much to the card as you can pay off by the end of every month.
Meet With Lenders and Shop Around for the Best Loan
While you may need up to a year to see a significant improvement in your credit score, meeting with lenders after 6 months of credit repair will inform your efforts going forward.
You’ll not only find out what kind of loan you qualify for, but lenders should be able to advise on the most effective means of improving your credit score faster.
Just how good does your credit score need to be? At the very least, work to get your score above 660, though 700 and above would be more ideal.
Though this process may seem lengthy, it’s nothing compared to the life of a home loan. Taking the time and making the effort to do it right is something you’ll thank yourself for every time you make a mortgage payment you can afford.